Mic/Instrument > Audio Interface > Computer. Most interface's come bundled with some sort of recording software. Depending on your needs, something like an M-Box might do the trick for you, which comes bundled with Pro Tools LE (I think).
In terms of mics you cant really go wrong with a Shure SM57 or (the step down)PG57 for instruments. I use an SM58 for vocal and just run guitar clean, both through a simple 2-input Tascam interface into my mac running Logic Pro 8. I use a Guitar Rig plug in for guitar sounds, very simple and easy to manage, although being digital it isnt going to sound AMAZING per se.