The Bark Knife is an item added by Roots. It is used to harvest Bark, like Oak Bark. Right-clicking a Wood Log (like Oak Wood) with it will consume one durability from the Bark Knife and drop the Wood's corresponding Bark (like Oak Bark). Additionally, the Wood Log will have a 30% chance of breaking when this is done. It will not drop anything besides Bark if this happens.
Runic Tablet entry