That's basically it Malibu. Look at it this way: when the piston is at the bottom of the cylinder and the valves are closed, the cylinder is full of air. When the piston moves up to the top (again, with valves closed), the air has no where to go. Instead, it's squeezed into the area remaining above the piston. 8.5:1 means that area is 8.5 times SMALLER than what you started with (piston at bottom). 8.5:1 reads "8.5 to 1". The 1 is the original volume of the cylinder, 8.5 is how many times smaller the area above the piston is. With the piston only half way up the cylinder, the ratio would be 4.25:1.
The ratio given for an engine is called static compression. When an engine is running both valves aren't closed for the entire stroke of the piston, so some pressure gets pushed out of one of the valves. Stock engines typically havea running, or dynamic, compression ratio of around 6.5, even though the static compression ratio may be 8.5:1 or higher.
Dynamic compression is harder to figure out. You have to know when the valves open and close, then measure the amount of stroke where both valves are closed. If you have an engine with a 3" stroke, there may be as little as 2.5" with both valves closed. In that case a 10:1 static compression engine would have a dynamic ratio of 8.33:1 (2.5/3 x 10). There are formulas based on intake timing and rod length -- check out http://www.kb-silvolite.com/calc.php?action=comp2