They use a very small canvas. For instance, the in-game patterns are 32x32 pixels. Just create a small canvas and experiment! For animating them, I can almost assure you there are more professional programs, but I use this.
well, I use sai!
First, I draw whatever it is lightly, then I shrink the page to the size I want!
Then, I make a new layer, and draw over the picture.
I will then either hide the original picture, or delete it.
I'm assuming you won't have apps so use ms paint and use the smallest pencil tool. It's a square. Then you just draw and color but only w that took and maybe the fill tool
You can get transparent villager sprites from http://ouka.kuronowish.com/rehoeass/
If the URL isn't working for you because of IP barriers then you can use this http://translate.google.com/translate?sl=auto&tl=en&u=http%3A//ouka.kuronowish.com/rehoeass2/
The site is in Japanese but it's easy to find out where you need to look. As far as I know is this the only public site that has transparent villager sprites. The site has zip files for characters and a whole gamut of items.
You can easily drag them on a (gif) background you copied from google images even with MS Paint.