Should I put all of my css in the sass folder with the .scss files, afterall .scss ends up being used in the .css files? How should I decide when to use the .scss & .css.
Compass puts your .scss files in your_rails_app/app/stylesheets, and remain your css files in your_rails_app/public/stylesheets by default, for reason. Personally I'll follow it's convention if there is no other issue.
You should always write .scss files, and let compass compiles them into .css files for you. Just place all your old css codes into your screen.scss file first, and clean it up into more structured code while you have time.
After using compass, .scss is your source code, the place you write styles; .css become some machine generate, less-readable files that better execute by machines only. You'll never (hopefully) touch them anymore.