class name in method along with variable

I am reading about design patterns in PHP and I keep seeing the following syntax, for example

abstract class AbstractObserver {
    abstract function update(AbstractSubject $subject_in);
}

or

class PatternObserver extends AbstractObserver {
    public function __construct() {
    }
    public function update(AbstractSubject $subject) {   
    }
}

(code is part of this example)

where "AbstractSubject" is another abstract class.

I am used to defining methods like methodName($var), not including a class name in there, like methodName(className $var).

So, what actually the class name does in a method ? My best guess is that it passes something like a reference in that class? Can you explain to me what it actually does?

Thanks