While hard drugs (cocaine, morphine, heroin) are banned as in other countries, the "soft drugs" - cannabis in all its forms (marijuana, hashish, hash oil) is legal for personal use only.
Magic mushrooms, also known as shrooms, were also legal until the 1st of December 2008.
Certain drugs that are legal in other countries such as bzp are illegal in Amsterdam but legal in the republic of Ireland.
Whilst Amsterdam has many coffee shops that sell cannabis quite freely to customers. It is in fact illegal to sell and quite frequently these shops are raided by police. It is acceptable to possess a small amount of these soft drugs, but you can still be charged for intoxication. By and large, the police and authorities take a 'liberal' approach to laws about drugs.