You are correct about the purpose, but I can't take credit for it. All of my great ideas are recycled and slightly modified from other homebrewers.
How to decoupage:
First, use heavy paper. Not quite cardstock, but a good quality, heavyweight paper.
Second, use Mod Podge to glue it down, then top coat it with mod podge and let it dry before applying your final finish (in my case, spar urethane). You don't need a heavy hand with the mod podge, just a thin, even coat on both sides will work best.
My early failures produced splotches because the polyurethane would eat right into the paper. The water-based mod podge protects it long enough for the topcoat to dry.