Many people are confused between AdSense and AdWords.
Google AdWords, as described earlier, is a Pay Per Click program for the Advertisers. AdWords, is a program for Publishers. It allows publishers to display Ads (through Adwords) on their site and in exchange receive the commission from Google. Today, you will find that many sites (owned by Individuals or Organizations) display ads from other sites on their site and thus, use AdSense as a revenue source.
Let me explain the difference in terms of how the money flows in these two programs. In AdWords, an advertiser pays money to Google for every click. In AdSense, Google pays money to the publisher for every click.
An interesting phenomenon which is common today is that site owners are paying to Google for AdWords which brings traffic to their site. These site owners (or publishers) encash on the traffic by having the visitors go out of their site by clicking on the Ads (displayed by AdSense). Effectively, they are making money (at least some of them), as the difference between the AdSense Revenue and the AdWords Cost.
Hope this makes the distinctions clear!