Data files are stored in a number of formats, the formats depend on which application created the file to begin with. For example, Microsoft Word stores files as *.doc but Adobe Photoshop stores files in a different format - *.psd. The file extension identifies the file's format.
When data is transferred from one computer to another, the computer receiving the data file may not be able to read the format without the right application installed. For example, an image created in Adobe Photoshop and saved as a *.psd file (Photoshop's format) would not be readable by Microsoft Paint.
This is becoming less of a problem as standardisation matures and applications expand the list of file types they're able to read.