This allow you to build a structure in the report wizard, from which users can create and customize reports.
You build custom report types off of the relationships (master-detail and lookup) between objects that is you can-
Choose which objects to display to users creating and customizing reports
Define the relationships between objects displayed to users creating and customizing reports
Select which objects' fields can be used as columns in reports
Reference: https://help.salesforce.com/s/articleView?id=sf.reports_defining_report_types.htm&type=5
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