For thousands of years a person was known by a name and his or her father or parents or something about the person that described him or her within the community. So you might be called "John son of Peter" or "John the strong one" or "John that lives under the hill". Those names might have later become John Peterson (or Peters), John Strong, and John Underhill. Eventually, these names were passed from generation to generation.

The Chinese were the first culture to use hereditary surnames about 5,000 years ago. Family names were not used in Europe until the 10th or 11th centuries. The practice is said to have started in Venice and spread to the rest of Europe from there.The practice also started with the aristocracy and moved down to the common peasant over the next 2 or 3 centuries. So don't be surprised if you run into a person without a family name during the Middle Ages.

How were family names formed?

A family name can be created from any word or description or idea that you can think of. There are, however, some popular methods including:

Type Description Examples
Patronymic From the father Williamson, Williams, Andrews, Adams, etc
Matronymic Fromt the mother (see Patronymic)
Occupation From the job a person does, his/her skill or trade Butler, Steward, Spencer, Miller, Smith, Turner, etc.
Social Status From the person's position in military, civil or social community Knight, Powers (took a vow of poverty)
Religious From a prominent person or recognized state St. James, St. George
Location From the village, river, mountain, etc where the person lived Church, Kirk, Cliff, Ashley, Brownell, Hill, etc.
Nickname A name that describes the person, a personality trait, etc Armstrong, Strong, etc.

There are, of course, exceptions or names where we just don't know the origin but the names above are the most common types.