Have you checked your ship equipment and housing item tabs? More on inventory here. As it states on that page, "You can access additional filters by clicking the right arrow button on the top right of this page."

darkrize9295 on Aug 5, 2013 wrote:

how does my ship equipment and housing items affect my backpack? when I look in my backpack, it hows that I have 118 out of 120 items even though in my backpack I only have my equipped items. please help. thanks.

They affect your backpack because they are all stored there. He doesn't mean the ships you have bottled or what equipment you have on them, he means the extra stuff. When you equipped your ships you got those items from your backpack, in the ship section. The same goes for housing items. The things that are not sitting in your house are in your backpack in the housing section. All three sections count towards the total. In the upper right part of your backpack screen there will be a triangle with a ship on it. Click that and it will show you what is stored in it. When you are in the ship section look up again and that upper right triangle will take you to your extra housing items. You can sell those unwanted items in the bazaar by clicking on that same triangle to get to the different sections.
Who knows, you may find some really neat treasure in there that you weren't even aware you had .