A digital to analog converter is a device that converts audio from a digital signal into an analog signal so the information can be channeled through headphones and speakers. A computer's sound card contains a DAC.
Most references to a DAC are describing an external DAC. An external DAC bypasses the computer's built-in DAC on the sound card or on the motherboard. The resulting audio from the external DAC is significantly higher in quality. The quality is higher is because the inside of the computer is looming with electric signals, some of which can obstruct some processes carried out by an on-board DAC.