I think the difference is between Microsoft online accounts where you can register an account with them using any email address and Azure AD accounts (e.g. for Office/Microsoft 365). The catch is that you can register for a Microsoft online account using an account that is also in Azure AD - so you end up with two accounts of different types with the same email address as username and (hopefully) different passwords. So hence the question asking which one of your accounts you want to log in with.

Yes, this can be confusing.