First, some definitions:
An entity is a container for bundles. Entities can contain multiple bundles. Examples of an eitity are Node, User, File, Taxonomy term, Taxonomy vocabulary.
A bundle is a set of fields that are treated as a group by the Field API. Buncles are simillar in concept to a node type in Drupal 6. You can have a bundle that describes an article or a photo or a story, for example.