Step 1: Draw and scan your picture. Here I'm using one of Wallabee and his ickle little brother (aaaw... the cuteness). You'll want to try and get your art as clean as possible, otherwise you'll have to spend a fair amount of time fixing it up. Furthermore, you'll want to equalize (under effects > tonal control) your picture to make the whites really white and the lines a bit darker. If you're in photoshop, this option is called leveling. However, I tend to use Painter7 for all of my coloring because I like the bushes more. But this is personal prefference of course.
When I color I take full advantage of layers. This way you can color things seperately so that if you mess up or want to adjust something the other colors/objects aren't affected. This is also convenient for making a background as we'll see later. For now everything is on the canvas/bg layer, but select all and paste, making a new layer (layer 2). Then make the canvas layer all white. As for layer 2, set that puppy on multiply and prepare to move on...
Step 2: Starting the skin. You can do these steps in any step you want really, but I go with the skin first. Create a new layer set on default and place it anywhere below the line layer (here it's called layer 1). Because the lines are set on multiply, they will blend through to any layer below so that even if it looks like you're coloring right over them, they'll still show in your final picture. Isn't that nifty? Now that that's taken care of, select a base color and color all skin areas evenly with it.
Step 3: Shading the skin. Shading is your friend. Really it is. Select a few darker shades of skin and set your brush (airbrush is really all I use... I love it so) on a lighter setting (22% here) and start lightly, shading building up as you go. I tend to go through each shade from lightest ending up with the darkest one... that brown you see on the side. Be careful though; if you were to use your darker shade EVERYWHERE on the picture, you wouldn't have made a contrast so much as made the whole thing darker. So use your darker colors sparingly; for example here on the side of his nose, under his hair, collar, and shoulder.
Step 4: Finishing the skin. You almost can't tell in this picture (mostly because I'm rushing through this), but in this step I select a whiteish color and add the highlights (nose, cheek, forearm, etc). Finally, if you ran outside of the lines anywhere, simply select an eraser and clean it up. This is very simple to do because the skin is on its own layer, so nothing else will be affected. Concerning the question of "how do I know where to shade in the first place?" the way I learned was by looking at other peoples' works and picking up a few quirks I liked from them. Furthermore, you want to think about where the light is coming from as well as realize that edges tend to darken in pictures. Practice is your friend, in addition to shading. ^^
Step 5: Hair time. All right... time to repeat those basic steps again for each new part of the picture! Create a new layer (layer 3) placed beneath the lines but above the skin. You know the routine now: select a base coat, fill in the lines, and then add shading with a darker color.
Step 6: Driving yourself crazy with hair. This step is not necessary at all, but I love coloring hair, so I tend to spend a lot of time doing it. Because hair is made up of individual strands, I try to mimic that on a simplistic level. Making the brush very small (size 1.4 here), I take that darker color, and run it along the edges of where I made the hair darker. I also do the same thing to a lesser degree with an even darker color.
Step 7: Hair crazies with highlighting. Remember highlighting the skin? This shows up a lot better in hair, simply because of the color difference. With a small brush once again (although if you weren't doing the crazy tiny hair strand thing you could always do this with a much thicker one), I highlight across the middle for some contrast and shine. Other sections of hair can be highlighted as well. I also decided that I wanted some parts of their hair to be even darker so I added that too.
Step 8: Clothes and finishing up. Really once you know those basic steps, you can color all sorts of things, be it simple clothes, hair, or whatnot. Just remember: make a new layer, add a base coat, then build it up using gradually darker shades as well as lighter ones. Keep in mind where shadows should go and when in doubt look for refferences!
The End! ^_^