Entities are single, logical identities representing users and applications across any tokens they have generated using auth backends, even multiple auth backends. For example, a user may have AWS credentials as well as LDAP or Active Directory credentials. These separate credentials (known as Aliases within Vault Identity) and all of the tokens generated by these credentials are all recognized as referring to the single user or application within various parts of Vault. Vault simplifies administration across multiple Identity Providers (IDP) by bridging them into a common identity.
Vault will automatically create an Entity if one does not exist for any client gaining access to a secret within Vault. Entities can have policies assigned to them that apply to all tokens associated with that entity. They can also be referenced in Sentinel policies, and custom metadata set on the entity can also be referenced within Sentinel policies. This can be used to group entities, but the Identity system also supports real groups.
Vault policies can be assigned to entities that will grant additional permissions to the token on top of the existing policies on that token. If the token presented on the API request contains an identifier for the entity, and if that entity has a set of policies on it, then the token will be capable of performing actions allowed by the policies on the entity as well.
NOTE: The policies on the entity provide additional capabilities and are NOT a replacement for the policies on the token.
Here is a good learn tutorial on Entities and Aliases