How does a web server determine whether a requested document includes PHP code?

Web server passes the requested document to PHP interpreter, which validates and processes PHP code in it, then the server reads the response from PHP interpreter and returns the resulting response to client.

For an instance, Apache HTTPD uses instructions such as AddType, to know how to process various documents, basing on their extensions (the following example is common and may require changes depending on Apache HTTPD and PHP configuration):

AddType application/x-httpd-php .php .p8p .txt

This directive instructs Apache HTTPD to let PHP process files which are suffixed with .php, .p8p or .txt, thus files such as index.php, Homepage.p8p and Settings.txt will be processed by PHP.