What is the significance of file formats and file extension?

File formats and extensions are more or less the same thing. Their importance lies in identifying how to use the file. That is, having a document with the extension .doc or .docx tells the computer that the file needs to be opened using a word processing application. If the file extension (the .XXX) is .jpg for instance, the computer knows that it is an image file and that it should open it with an image viewer.

I hope this clears things up for you.