[Morgeruat]

a bag of holding is a magical sack, bag or pouch that can hold a set amount of weight or a certain area, whichever is greater, 250lbs-5000lbs, not sure about size, but it holds the items in an extradimensional space where they are kept safe and prevents you from appearing to be an easy mark to thieves(looking for anything your pockets might hold), city guards(trying to control weapon ownership among non-nobles) or anyone else who would search you for things to steal/confiscate.
the bag never increases in weight making it a great way to pack a dragons horde out of a dungeon, and is one of the best magical items in d&d, unless you jump into a portable hole, rope-trick spell, or other extra-dimensional space in which case the bag of holding ruptures and spills it's contents into the astral plane.

There is also a cursed variety called a bag of devouring, it functions as a bag of holding for a while then has a chance to either randomly empty itself into the astral or "bite" off whatever apendage reaches into the bag.

for the sake of bg2 it is a bag that can hold almost any other item, and has a VERY large amount of space, arrows, sling bullets, and crossbow bolts however count against the maximum carrying capacity for each arrow/bullet/bolt in the bag.