A Plugin is a group of PHP functions that can extend the functionality present in a standard WordPress weblog. These functions may all be defined in one php file, or may be spread among more than one file. Usually, a plugin is a PHP file that can be uploaded to the "wp-content/plugins" directory on your webserver, where you have installed WordPress. Once you have uploaded the plugin file, you should be able to "turn it on" or Enable it from the "Plugins" page in the administration interface of your weblog. The WordPress source code contains hooks that can be used by plugins.

Reference http://codex.wordpress.org/Glossary