It's all the objects within a given volume needed to solve a particular physics problems. Theoretically, if you provide a physical description of the objects (like their mass, position, orientation, angular momentum, velocity, shape, and (for more complicated problems) higher order properties like elasticity and chemical constituents *and* the boundary conditions of the system (how it interacts with the rest of the world), you can calculated what will happen over time. A "closed system" (the most popular kind) is one in which there is no relavent interaction with anything outside the system.
Everything in the universe that is observable (including the universe itself) is technically part of one or another "physical system". The term is used to distinguish it from things like political systems and mathmatical systems, which are abstract relationships, as opposed to objects. It means you're gonna do a physics problem on it.