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An allowed area restricts where colonists can perform work and joy activities. It does not restrict them from pathing outside an allowed area in order to get to their destination. A hunter will not hunt animals that are outside of his or her allowed area. Firefighters will not extinguish fire that is not both in the home area and inside their allowed area.
From the Expand Allowed Area button, clicking 'Manage allowed areas' allows the player to create or delete areas, rename areas, or invert an area. Inverting an area allows a player to effectively paint the entire map except for the area as drawn by the player. Colonists may still travel through the unpainted void of an inverted area. They just won't perform any activities there. As many as eight areas may be created. In a colonist's inspect pane they may be assigned to a single allowed area. By default it is 'unrestricted'.
Tamed animals can also be assigned to an allowed area. This can be useful for keeping animals from eating high-value crops, accidentally triggering spike traps, or wandering into the path of raiders who will attack them.