Adjust Aspect Ratio
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The Aspect Ratio panel is located to the top of the video panel.

apsect_ratio_letter_box  
 
Input Aspect Ratio - The aspect ratio of the original video. When a video is opened, this value is retrieved from the video file automatically. You may adjust it manually by using the combo box.  
Reset - Retrieve the aspect ratio from the input video file.  
Output Aspect Ratio - The aspect ratio of the target video.  
Scaling - How is the input video resized to fit the output aspect ratio.  

There are three different options to handle the scaling. To make this subject clear, let's take a look of a wide (1.98) video, and we want to adjust it to a normal (4x3) video.

This is a screen shoot of the original video.

video_original  
 
Now, let's set the output aspect ratio to 4x3, and set the scaling to "Scale to Fit".

video_scale  
 
You can see the whole video is stretched. The output aspect ratio is essentially ignored.

Now, change the scaling to "Letterbox".

video_letter_box  
 
You can see, black strips are added so the output video looks proportional.

Now, change the scaling to "Pan & Scan".

video_pan_scan  
 
For "Pan & Scan", the sides of the original video are removed, so the output video looks proportional.