ActiveRecord::RecordNotFound is an error in Ruby that occurs when a Rails application, using the ActiveRecord gem for database interaction, fails to find a record matching the given parameters. This error typically arises when a record is sought by an ID that doesn't exist in the database or when a query yields no results, such as searching for a non-existent email address. Developers can handle this error using a begin-rescue block to redirect users to a custom error page or by utilizing the optional method in Rails 4.0 and later, which returns a 404 status code when a record is not found. Tools like Rollbar can aid developers by automating error monitoring and management, thereby enhancing error-handling processes and improving deployment confidence.