"Theme" is the name for all the files that are responsible for the display of the overall layout. You can have several themes in you system for various function. For example you can let users decide on which layout they prefer or you can display the backend differently from the frontend.
Moreover the theme is the central folder for all your module template changes, your custom plugins and your custom classes. Whenever you change a module template store it in /themes/<theme name>/templates/modules/<module name>/ - thus your changes are save in case you update the module. If you make a change in any other folder but the theme folder, you are doing something wrong.