If the leather is already colored,it is probably treated.You want plain vegetable tanned leather for forming.The technique is to moisten the leather and form it around the knife.The knife is usually wrapped in saran wrap to protect it from the water.Clamp the leather in place and let dry.Finishing the sheath depends on the style you are making.Check out the tutorials by running a couple of searches on "making a leather sheath","making a pouch sheath",etc.Most of the knife making books and videos have a section on sheath making,as well as leather craft books.The local library may have several to read.
I too had the same question months ago...I had several suggestions from those making sheaths longer than I have. One guy uses acetone to wet the leather, as it evaporates quick....terrible choice! It was way too strong, removing all the natural oils from woods such as rosewood, cocobolo, and ironwood...not to mention that it will also remove leather dye, and leather cement...not good. Also tried was alcohol...as it also evaporates quick, albeit, not as quick as acetone. Again, bad choice, but not as bad as acetone, but the same bad results basically as acetone, but not to the same degree. I found that both would "streak" untreated leather, even after it was dry...I dunno...just bad all the way around.
I eventually learned my lesson and went back to plain old water and resigned myself to the fact that I would just have to wait longer for the leather to dry and plan for that accordingly. Also, no dissolved leather cement, no streaks, nothing.....obviously very mild on the leather. I made sure to use hot water (as hot as I could stand) and it softened the leather better for me. And when it dries out, it the leather will be hardened and will take a coat or two of some sort of finish to complete the process...I like a lacquer based product from Tandy leather, but just plain old spray lacquer (satin finish!) works great for me. Use light coats of the spray or you will not get a pretty finish.
I've found a way to skip the wet forming with water. I actually wet form with the leather dye. This is what I do. After the sheath is completely put together, I take a 2 1/2 gal. empty water container, cut in half. I pour a small amount of dye in the container, the I dip the entire sheath in the dye covering the entire sheath. I then take it out, wipe off excess dye. With the knife wrapped in plastic wrap, insert knife in the sheath and form it while wet with dye. I take out the knife and let dry in front of a fan for 24 hours. Sounds crazy, but it works for me.