I'm using Timer1 to count my clock but I'll reply anyway:
The prescaler is like an external counter for the timer to allow you to count longer time periods. For example, if the prescaler is set to 1:4, the Timer will only increment every 4 instruction cycles.
In my example I am using Timer1 (16-bit), I have the prescaler set to 1:1 and am using a 20MHz crystal and I want to update a register every 10 milliseconds in order to use that as my timebase.
With a 20MHz clock, one second will take 5,000,000 instruction cycles. That means to have a delay of 10 milliseconds I need to call an interrupt every 50,000 instruction cycles.
Because Timer1 is a 16 bit timer I can just reset Timer1 to about* d'15,536' every interrupt. d'15,536' is 65,536 (Timer1 overflow) minus 50,000.
With Timer1 set up like that I will have an interrupt called every 10 milliseconds.
So to count seconds I simply set a register to 100 and decrement it every interrupt. When it reaches 0 I update the seconds register and reset the first register to 100.
I hope that helped.
* You also need to take into account the amount of instruction cycles it takes to reset the Timer. For example, if it takes 15 instruction cycles from when Timer1 overflow occured until the timer has been set to your new value, then add that to the adusted Timer value.