Fire needs three things: fuel (the material which burns), activation energy (heat) and oxygen. This is called the fire triangle.
When you put water on fire, it reduces the heat of the burning material, absorbing the heat energy, and changing to steam, hindering the reaction, and reduces the ability of oxygen to reach the reaction.
This being said though, for certain types of fire you do NOT put water on it or it will cause the fire to worsen or spread, such as with oil fires (water turns to steam carrying flammable oil outwards) or some chemical fires.
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