If someone is potty-mouthed, they use a lot of rude words — swear words, dirty words, words you would not say in front of a teacher. It is a soft, slightly jokey way to say this, not a hard insult. A parent might say it about a child who has copied bad language; friends might say it about a film with a lot of swearing. You would use it at home or in chat, not in a school essay or a job letter. The potty here is the little-child word for the toilet: a potty mouth is a mouth full of dirty language, the same joke as a dirty mouth. It does not mean the person talks about the toilet all day. And it is not the other British use of potty, which means a bit crazy — that is a different thing. People also call someone a potty mouth; potty-mouthed is the describing word for the same idea.