language

This is the folder for your translations. In fact, if you only have one language, there is no actual need to maintain translations here. However, it is best practice to separate labels and configuration.

labels.xlf

This XLF file is the english basis for your translations. All translations for backend labels as well as for frontend labels are defined here. Translations to other languages are defined in separate files prefixed with the language code e.g. de.labels.xlf.