What is a factory reset, When, How, Why to use it

First lets understand what a factory reset does. It removes all USER DATA and restores the device back to factory settings providing that the device is not rooted. User data is defined as apps, call logs, contacts, and anything else the user has placed in the devices memory. Stuff that is on the SDCARD is not affected by a factory reset. A factory reset really only deals with the Data and the Cache partitions.

If you are on a Rooted device then again a factory reset will only remove the Data and Cache partitions. It does not mess with the System partition. If you have a custom ROM on the device after a factory reset you will still have that same custom ROM on the device. This is because again factory reset does not mess with the System partition of the phone.

Factory reset is given its name because the manufacturer of the device does not expect that you will change the ROM that is standard on their devices. While the practice of Rooting is not foreign to them they do not expect that the user of the device will change the basic structure of the OS. Which many who are rooted do. A factory reset will also not remove any ROM upgrades or OTA's.

Doing a factory reset has some advantages for a few purposes. One of the big ones is wanting to remove all Data from the device. This is handy if you plan on giving the device to someone else and don't want to give them your contacts or any other information. In some circumstances it can even be handy to just start over especially if you have some minor issues and you assume the issues are Data related. If rooted its a great way to wipe the Data and Cache area's to prepare to change the ROM of the device.

Hopefully by now you have a better understanding of what a factory reset is and why you would want to use it. Also I hope this has cleared up some confusion about this subject as there are plenty who use this the wrong way and then are like well poop. I know the first time I did it I though well at least I can go back to factory settings and boy was I surprised when I found that the custom ROM I put on there was still there.

EDIT: Please do note that a factory reset is not recommended for some devices as it can do more harm then good. One should always check with the community of the device you have to make sure it is not going to have any ill affects. Also you should make sure that you have a backup of everything before going down this road. Again this is a guide to help explain what it is and not a thumbs up to do so.