The “channels” means PCM channels which is roughly analogous to analog audio patch cables with two channels being like a stereo pair and 5.1 being six cables. Different devices support different numbers of PCM channels and that setting sets the maximum number of channels that it will output. If your source isn’t in a format that is covered in the enabled passthrough options, and it has more channels than what the channels setting is set to, then your output will be resampled into the number set in that setting.
There is an audio guide on this sight that may provide further insight…