Circuits sharing a common supply (analog or digital) can be affected by noise in that supply rail. Decoupling aims to remove that noise from the supply feeding a particular device. The capacitor and other components providing the decoupling do not necessarily need to be close to the devices they are decoupling.

In digital circuits in particular there are current spikes in the supply lines of chips whenever their outputs change. The chip needs a little extra energy from the supply during this transistion. To avoid putting this onto the supply rails a capacitor is connected as directly as possible across the chip supply pins. The charge on the capacitor provides a small local energy supply just for the extra energy needed during the transition. For this to work it is important the energy supply (capacitor) is connect close to the chip. This too is sometimes called decoupling but its purpose and the way it achieves it is obviously quite different to the other example and for that reason I prefer to call it bypassing.

Ian