System software is software that controls computer hardware and allows other software to function. It includes the operating system and utility programs. System software either works directly with users or in the background. It performs functions like booting the computer, storing and retrieving files, and providing security. Application software consists of programs designed to help users with tasks like business activities, graphics projects, and communications. The key difference is that system software manages hardware resources and provides a platform for application software, while application software performs specific tasks for users.