To have a deep understanding of the concepts related to water conservation, the representative concepts of water conservation, water conservation function and water conservation capacity were sorted out and differentiated based on reviewing of relevant researches both at home and abroad and the definitions with clear connotations and denotation were put forward. Water conservation is a process and phenomenon in which the ecosystem intercepts precipitation, stores water, regulates runoff, purifies water quality and maintains ecology. Water conservation function has both narrow and broad sense. In the narrow sense, water conservation function is holding precipitation, runoff regulation and influencing precipitation. In the generalized sense, water conservation includes soil and water conservation, degradation reduction of vegetation, underlying surface conditions improvement, biodiversity and ecological environment protection functions such as regulating climate, as well as the special features in the narrow sense. Water conservation capacity is the quantitative embodiment of water conservation function. The water conservation capacity calculation is the calculation of water quantity in the narrow sense while in the broad sense, it should be the comprehensive calculation of water quantity, water quality and some ecological indexes. Finally, taking the source region of the Yellow River as an example, different calculation results and application of water conservation capacity are introduced.