A defect is a bug, an issue, or some problem with the a product. A defect can be identified by a customer, by a member of your sales or support organization, and (most often) by a member of your own team (a tester or an engineer, for example).

Many defects can be fixed easily (often during the same sprint in which they were discovered) and do not need to be tracked as a work item. Some defects require visibility (such as ones raised by customers or support) and need to be tracked as a work item (for visibility). Some defects are complex and may require research by team members or significant work by engineering (and follow-up testing to ensure the defect is fixed) or work by an external team. Any work item that affects a team's overall velocity should be tracked as a work item so that it fixing those kinds of defects is factored into the team's overall velocity.