The ability cap refers to the limit, imposed by the game engine, to increasing ability scores through magical means. This limit is a bonus of +12. "Magical means" includes anything, such as items and spells, that is not part of the character creation and level-up processes.
True racial modifiers are not included in this cap, but most subrace modifiers are.
Penalties to an ability score will lower that ability score's cap. For example, if strength has been lowered −2 from a spell, then equipping items that increase strength will not be able to give a net increase higher than +10.