Note: This was not originally written by me. This was first written by @airhuff. I just thought it was relevant in this question as well.
According to this Wikipedia article:
...a physical system is a portion of the physical universe chosen for analysis. Everything outside the system is known as the environment. The environment is ignored except for its effects on the system.
The split between system and environment is the analyst's choice, generally made to simplify the analysis. For example, the water in a lake, the water in half of a lake, or an individual molecule of water in the lake can each be considered a physical system.
Every system has some relationship to it’s surroundings. As another way of stating the above, we can describe the surroundings, or environment, as all parts of the universe that is not part of the system. We can then generally categorize the system as being isolated, closed or open:
Isolated system: Neither matter nor energy may pass into or out of the system.
Closed system: The exchange of energy is allowed but matter may not pass into or out of the system.
Open system: Both energy and matter can pass into and out of the system.