In general, entities are records used in transactions. For example, Part Item and Customer are both entities that are used in the Sales Order transaction. Whereas entities have a flat structure, transactions will have at least a Doc and one or more Line Items. The Sales Orders object inherits from Doc and SalesOrderLineItem inherits from Line Item.
One thing to keep in mind about transactions vs. entities and that is transactions auto-populate from entities. For example when building a Sales Order request, you do not need to specify SalesRep if the customer is already coded with a SalesRep. You would only specify a SalesRep if it is not the default.