Dropping a cell phone in water can cause two types of damage; if the phone is on, an electrical short can occur, and whether it is on or off, when the water evaporates, it can corrode components in the phone. The same issue holds true for other kinds of electronics. Someone who drops a cell phone in water should immediately power it off and remove the battery, and must allow it to dry completely before attempting to turn it on again.
The first problem arises when the electronic circuits in a phone are active because it is turned on. Even in sleep mode, the phone's circuitry is still powered to allow the phone to wake up when activated by the user or incoming data. When water hits the circuitry of the phone, the electricity in the phone takes the path of least resistance, which happens to be the water. Water is an excellent conductor and will readily carry the current, creating shorts that damage the systems inside the phone by overloading them with energy.
If a phone is powered off when dropped, it is still important to take out the battery and dry it completely. Even it is off, it can still incur some electrical damage, depending on the systems it uses; for example, the battery may supply an internal clock that keeps time. If the battery compartment is not user serviceable, it may be necessary to take the phone to a service center.
The next issue is corrosion. Unless a cell phone is dropped in distilled water, the water will contain corrosive impurities that can eat into the components if the water evaporates slowly. Phones dropped in salt water or other waters with a high mineral content should actually be flushed with distilled or fresh water before drying, since deposits of salts can form on the circuitry. The phone's owner can put the device into a desiccant, like rice, which will absorb water and help dry out the phone quickly as possible.
After dropping a cell phone in water and drying it, it is important for the owner to make sure the phone is completely dry before replacing the battery and powering it up. Any moisture inside the phone can create a short as soon as the phone is powered on, damaging and potentially destroying the circuits inside. It is a good idea to leave a phone fully submerged in desiccant for at least 24 hours before checking it to determine if it has dried out.