Encoding involves converting data into another format for transmission, while decoding is the reverse process. There are two main types of data: analog and digital. Analog data uses continuous physical quantities like voltages, while digital data represents information as digits or numbers. There are four possibilities for encoding and decoding: analog data to analog signal, digital data to analog signal, digital data to digital signal, and analog data to digital signal. Digital signals are represented as a series of 0s and 1s and allow for error correction, while analog signals transmit exact waves that cannot be reconstructed if corrupted.