Most businesses have several incoming telephone numbers used for specific purposes. For example customer service, sales, etc. Some have an individual telephone number for each user in the system. In a home setting on the other hand, each telephone number comes in on a different pair of wires typically. This is not practical in a business enviroment that has many telephone numbers.
Why was DID actually Created?
So DID ("direct inward dialing") was invented as a way to re-use a limited number of physical phone lines to handle calls to different published numbers. In a business with DID, the phone company uses DID signalling to identify the number they are about to connect to the business's PBX. Historically, this was done by pulsing the last 3 or 4 digits of the number being dialed before connecting the number. The PBX would use these DID digits to switch the call to the right recipient.
In modern PBX's, typically, digital methods (example: PRI) are used to do the same thing, ie. supply the "called party" information. But many business's still have old PBX's which use the analog signalling I mentioned before. The type of telephone lines used for analog DID are different than regular home telephone lines. Usually, battery voltage is supplied by the business PBX instead of the telco. Also, the telco signals a new call by bridging the line instead of by ringing the line. The receiving PBX signals back that it's ready to take the call by momentarily reversing polarity of the voltage on the line (this is called "winking" the line)
Old Fashion Way: (PSTN WORLD)
Direct Inward Dialing is used when your PBX telco connection allows direct dialling to extensions within a PBX, using physical lines (or channels on a PRI) on a shared basis. DID service consists of identifying the "called party" by using DTMF or by digital means, before connecting each call. The service can be sent over an E&M Wink T-1 as DTMF and also as D-Channel information on a PRI.
On a PRI connection, the telco can send only the digits that differ between the group number and the extension (often four digits) or the whole number - it depends on the connection to the telco.