An extension is a software package that extends your Joomla! installation in some way. A small selection of extensions is included with the default Joomla! installation but many more are available from the Joomla! Extensions Directory.

The term extension is generic and the following specific extension types are available (listed alphabetically):
Component (since ) . adds custom functions to your site that can be selected from menus
Language (since ) . defines an additional language for your site
Library (since ) . provides functions to be used by other extensions
Module (since ) . shows nonessential data in a side box, possibly on multiple pages
Package (since ) . bundles related extensions
Plugin (since ) . modifies content in articles or provides functions to extend other extensions
Template (since ) . define the look, feel, and navigation capabilities of your site

For an overview of the most important extension types and the functionality they provide, see Extension types (general definitions)

Reference: http://docs.joomla.org/Glossary