What's happening is you're updating the local name server that is managing your web site.
Let's see if I can map this out and have it make sense...
User makes a request for mysub.rsbauer.com (my site - this subdomain doesn't exist)
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DNS looks up .com
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DNS resolves .com and looks up rsbauer
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DNS finds rsbauer.com resolves to IP address
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Request is forwarded to the IP address and the domain must then be resolved locally (assuming the web server is doing something like virtual hosting). At this point, the name server will check the in bound domain and tries to find a match. If a match exists (or a DNS record for the match exists), it will pass the request off to the service that was specified in the record.
But don't quote me on that. Its taken me several years to get to this point of understanding and I may not have gotten it all correctly. But basically, it will resolve the top level domain name, and then if you have a local name server, it will check if that subdomain exists. If it does, then life is good. If not, then the server responds with something like the domain doesn't exist.
I had seen an article on the method I attempted to describe up above. Let me see if I can find it again. The beauty about was that it was simple to implement and maintain.