There are several types of LCD panels: Twisted Nematic (TN), In-Plane Switching (IPS), Vertical Alignment - MVA (Multi-domain Vertical Alignment) and PVA (Patterned Vertical Alignment), along with several variations on each type. Below is perhaps the most simplified explanation (within reasonable constraints) that I am able to offer on the moderately common TN panel type.
There are fundamentally two approaches to basic liquid crystal display technology - passive and active, also referred to as passive matrix and active matrix respectively. Active matrix has several key advantages over passive matrix liquid crystal technology and is overwhelmingly preferred for creating high performance monitors, televisions, and projectors.
In the simplest sense a Liquid Crystal Display (LCD) is comprised of a special liquid with unique molecular properties that is tightly sealed between two optically transparent sheets of glass. Small voltages are applied and varied to control the alignment of elongated molecules in the liquid crystal material, which in turn controls the amount of light that is allowed to pass through both the liquid crystal layer and ultimately the outer glass layer.
Liquid crystal materials emit no light, i.e. they are transmissive (as opposed to emissive) and thus function as an electro-optical light modulator. Thus electronic displays, such as monitors, televisions, and projectors that utilize liquid crystal technology will require an internal light source to generate an image. Direct view LCD panels such as monitors and TVs use what is commonly known as a backlight; projectors use a lamp. The typical backlight functions very similarly to other common electroluminescent devices such as neon and fluorescent tubes.
At the heart of an LCD panel is the ability to exploit the unique molecular properties of liquid crystal materials in order to modulate the amount of light transmitted through the outer glass panel; in essence liquid crystal panels function as an electro-optical shutter. One of the more common methods used to control the molecular behavior of liquid crystal materials is based on the Twisted Nematic field effect. In the TN type of LCD panels the outer sheet of glass incorporates one of two polarizing layers; the other polarizing layer resides between a light source (used in backlit displays) and the inner glass substrate. Molecularly bonded to each glass substrate is an alignment layer combined with an electrode layer which, in the default OFF-state, is used to induce a 90 degree continuous helical twist of the molecules in the liquid crystal layer. Because liquid crystal material is birefringent, when the liquid crystal layer is in the OFF-state light passing through the first polarizing filter is rotated by millions of microscopic liquid crystal helices, which act as helical waveguides, as the polarized light passes on through the liquid crystal layer becoming aligned with the polarized outer glass layer. In the full ON-state the applied electrical field forces the liquid crystal molecules to align along their long molecular axes in the direction of the electrical field, i.e. perpendicular to the electrode layers. The full ON-state prohibits the formation of a helical waveguide and thus the polarized light wave from achieving the required alignment necessary to pass from the liquid crystal layer through the outer layer of polarized glass. Color reproduction and linearity as well as the limited viewing angles, especially in the vertical direction, are the major shortcomings of TN panels.
To overcome the shortcomings inherent in TN technology several panel manufacturers are now using variations of Vertical Alignment or In-Plane Switching LCD technologies, which provide benefits beyond that offered by basic TN LCD technology to both consumers and manufacturers. For a thorough explanation of MVA, PVA and IPS technologies see the resources listed below.
In order to electronically control the individual sub-pixels millions of microscopic "thin film" transistors are photo-lithographically deposited on the surface of the inner glass layer. This provides the ability to directly control the quantity of light passed from each individual sub-pixel, through the use of digital technology, by controlling the physical orientation, i.e. the amount of twist, of the liquid crystal molecules that make up each sub-pixel. The outer polarized sheet of glass contains millions of red, green, and blue microfilters deposited on its surface. Each individual color microfilter, when combined with a corresponding thin-film transistor on the TFT substrate, forms pre-arranged cells, i.e. sub-pixels, which ultimately comprise the individual pixels.