Formal parameter The parameter defined in the parameter list and used in the function.
Actual parameterThe actual expression or variable passed to the program when it is called.

Eg :
Let us assume we have a function called greatest_of_2 which returns greatest of 2 given numbers.
 Its signature may look like this.
number greatest_of_2(num1 number, num2 numer);

Now let us write a query using the function
select ename, greatest_of_2(salary, nvl(commission,0)) from emp;

In this case, num1 and num2 are Formal parameters and salary and nvl(...) are actual parameters.