Generation 1 is the first batch you brew with a new yeast.
Generation 2 is when you use part of the cake, either straight or washed and a new starter. Any re-use is a new generation.
Reason: The yeast manufacturers keep pure yeast strains, and grow each batch from the original strain under lab conditions. Each time you use it, it mutates. Everything you do with the yeast; you alter it's environment, or alter the fermentation temperature, alter the beer gravity, the make-up of the wort, when you harvest the yeast ....... it all makes for selecting different characteristics of the yeast, and the yeast evolves to match it's environment. Therefore the more times you use the yeast, the more it changes from it's original characteristics.
This is not always all-bad. You are essentially creating your own strain, but it will be different from the original.
Sometimes, the way we handle yeast we get bad characteristics. Some people harvest from the secondary (because it is cleaner), but in doing so, you are harvesting the yeast that did not flocculate quickly. So you are starting to select particular traits of the yeast.