Storage is partitioned, like a hard drive is. Depending on the model, it could be a total of 8GB, 4GB of which is used to hold the system, 3 of which is used to hold databases and 1GB is free for user space (like apps, music, etc.)
It's like net weight, tare weight and gross weight. If you don't specify, you may be including the weight of the truck as part of the product it's delivering. Evidently your phone has 1GB of internal user storage, and a few apps can fill that pretty quickly these days. (As more and more utilities come out that allow people who have no idea what Java code even looks like, apps will get larger and larger. Shoehorns are no longer a part of the programmer's toolkit. The attitude seems to be "if it fits and runs on the simulation of my phone, that's good enough" - not realizing how many users won't buy that app because it won't fit on their phones with a few other apps in it.)
@Madd54:
Notice that, out of 32GB of internal storage, you have only 4.95GB free. That's a little more than 1/8 of total storage.