It works mostly like acronyms work in English. The most usual form is to take the first letter of sequential words and make a new word out of them. Sometimes in Hebrew, the result may sound very different than the way the letters sound at the beginning of the original words, because the letters are taken as is, unvoweled, and so can be voweled as sounds (or "feels") natural to the construction of the acronym word. And also, of course, some letters can be hardened or softened according to where in a word they fall, so for example, the caf that begins the word ketuvim ("Writings"), when it falls at the end of Tanach, is softened from a "k" sound to a "ch" sound. You will occasionally find other ways of combining, especially when what is being turned into an acronym is a name or a phrase, but first letter of each word is definitely the go-to standard.