What you can hear recording - Windows 7/8 - Audacity
Click on the "Start" button (bottom left) then "Control panel", then click on "Hardware and sound"
Click on "manage audio devices"
Click on the "Recording" tab, right click in the middle of the windows, select show hidden / disabled devices
Select "Stereo Mix" (or similar eg "What you can hear") and make this the default, disable your microphone for the moment (right click "Set as default" / "Disable"). The result should look roughly as follows:
Open Audacity, click on "Edit" / "Preferences", then select "Devices" and ensure that "Stereo Mix" is selected as the recording device and that stereo is being recorded (2 channels)
Select "Recording" and ensure that "Overdub" and "Software play through" are deselected (if they are ticked that would generate an unpleasant echo effect)
Enable monitoring so you can see how strong the current audio is and click on the red "Record" button to record
When recording the strength or loudness of the sound playing should be at about 75% of maximum when monitoring. Your recording should not entirely fill the track (see below), if it does the sound is clipping because the volume has been set too high. If the volume is too high you can reduce the system volume and / or reduce the "microphone" sensitivity.