What is hostrecord for in setupVars.conf?

pihole -a hostrecord fubar 1.2.3.4

Will create an hostrecord entry fubar 1.2.3.4 in setupVars.conf

What does this entry do? At first I thought it was for creating DNS records similar to what you can do in /etc/hosts, but running that command multiple times only modifes hostrecord, not create additional entries.

It creates an association like in /etc/hosts, but in a dnsmasq config. You can use /etc/hosts instead if you want.

But only one record?

Yes, right now it only does one record. You should use the hosts file or a new dnsmasq config file to add more.