This is a relatively new term without a generally agreed upon definition. In the context of sexual orientation, one way to think of pansexual is that while heterosexual suggests your interest or desire is directed toward people of a different gender and homosexual suggests interest and desire directed toward people of the same gender, and bisexual suggests the same for more than one gender, being pansexual means that you identify as having a sexual orientation towards everything, including people of all genders. Pansexual is a way of acknowledging that your sexual and romantic interests and desires cannot be easily slotted into one of two or three categories.
Sometimes this is all it means when a person calls themselves pansexual. For others the term acknowledges that one can be sexually aroused and interested in things, not just people. For example a song or a babbling brook by be experienced as sexual, sensual, or erotic.