Acetates are used to test the sound quality once the recording has been transferred onto disc. They are made by a machine which cuts into the acetate/lacquer like a lathe.
Generally, acetates are 12" or 10" in size with 7" worth of sound grooves on it. They are also mostly 1-sided. Though in saying the above there is always exceptions.
Some DJs also create their own acetates for their sets. These are not made to check the sound quality of future vinyl records - they are simply made as one-offs so they can be played with the rest of their records. An example of this is the DeeJay Punk Roc 10" acetate that was pressed of his Intergalactic remix. Only one was made, and this was for his own DJing.
The problem with Acetates is that they are quite fragile and after too many plays the sound quality will reduce dramatically.
So do I have an Acetate or a plain old record?
The easiest way to tell is to tap the record with your fingernail - it sounds a lot different to a normal vinyl record - sort of metallic and they are heavier than normal records. They also smell differently! (honest!)
These Acetates are made at the stage between the master-tape and the finished product released CD. They are used to check the sound quality, and are sometimes given to the band and record company to listen to. These types of Acetates are quite rare, though there is the problem with authenticity as CDRs are extremely easy to duplicate these days.
Other types of CD Acetates at the moment are CDRs which are being used as Promos. These are not being used to check the quality of the recording like the above CDRs, but are simply distributed as Promo CDs because in most cases they are cheaper to make.