When you use an adjustment layer, by default it affects every single layer below it. In order to only affect the first layer below the adjustment layer, you must clip that adjustment to the layer below. In this video I will show you how clipping masks work with a practical example so you can understand it better.
So we have another example here. Take a look at this simple setup. We have a layer named wood-background and a layer called circle on top of it.
Now, we also have a layer called woman which is quite big.
If I want the layer called woman to be visible only over the area of the circle I have to place it above the circle layer and clip it to it. I can clip the woman layer to the circle layer by right clicking on the woman layer and choosing “Create Clipping Mask”. You can also press and hold the Alt key and put the mouse between the woman and the circle layers and you will see that the cursor changes to a small square with an arrow, when you see that just click and you will create a clipping mask.
Once you clip a layer to another one, you will see that now the effect of the clipped layer is only visible over the layer below it. In our example here, the contents of the woman layer are ony visible over the surface of the circle. You should also notice that the woman layer now has a small arrow icon on the left side which indicates it’s clipped to the layer below.
Now I can move the woman layer and make it fit my circle. Let’s assume it’s some sort of avatar or profile picture.
Now let’s assume I want to add an effect to this profile image. I could select the woman layer and go to Image>Adjustments and select any adjustment (Color Balance for example) and make a color change but that would affect the woman layer permanently, that’s called “destructive editing” and we don’t want that. I want to use the Color Balance as a layer instead but in order to do that I have to clip the Color Balance adjustment layer to the woman layer otherwise it will affect the wood-background layer instead.
You can see on the image below that if the Color Balance is not clipped to the woman layer, the wood-background is also affected by the adjustment and it looks green.