Software refers to computer instructions and data that can be stored electronically, while hardware consists of the physical parts of a computer. There are two main categories of software: system software which includes operating systems and utilities that enable the computer to function, and application software like word processors and databases that do real work for users. Hardware is divided into internal components like motherboards and RAM, and external peripherals such as monitors, keyboards, and printers. Software identifies programs, sets up applications, organizes work efficiently, and interacts between hardware and users, while hardware functions as input, processing, output, storage, and peripheral devices.