Generally speaking, the number of bits of a CPU can be compared to the number of cylinders of a car. This is the generation where counting bits stopped making sense because not even the marketing departments of the different companies agreed anymore in which generation they were in.

In the fifth generation, the three competing systems were the Sony Play Station (32bit CPU), the Sega Saturn (two 32bit CPUs which SEGA marketing sometimes added up to 64bit which is technically quite nonsensical) and the Nintendo 64 (64bit CPU). So whatever technical definition you use, either the Mega Drive is a 32bit system or the SNES is an 8bit system. But the Ricoh 5A22 16bit CPU used by the SNES only had an 8bit data-bus.

Now you could say 'duh, so it's the bus size which counts'. But the Motorola 68000 CPU of the Sega Mega Drive was technically a 32-bit CPU, even though it communicated through a bus which was only 16bit wide. Both systems were marketed as 16-bit systems. The two dominant systems were the Sega Mega Drive (aka. The fourth generation, commonly called the 16-bit generation, is a bit fuzzy. All systems used 8bit architectures through and through. The market-leader of that generation was the NES, the runner-ups were the Sega Master System and the Atari 7800. The third generation of home game consoles was very obviously an era of pure 8-bit systems. Any of these CPUs can still be used to make calculations with larger numbers, but it needs multiple operations to do so. An 8bit CPU can work with numbers up to 256, a 16bit CPU with numbers up to 65536 and a 32bit CPU with numbers up to 4294967296. Grossly oversimplified the bit-size of a CPU, is the size of numbers it can perform calculations with in one operation.

It usually refers to the CPU architecture.

16 bit sega games