Hi Prasanthi,

Please follow the below steps for creating a custom object.

Step 1 – Click (Your Name)->Setup->Crete->Objects.
Step 2 – Click “New Custom Object”, or “Edit” to modify existing ones.
Step 3 – This is where it becomes somewhat involved. There are multiple fields to provide data for, and we will discuss each in a little detail now.

“Label” – This is a naming field for the object, which can refer to from Visualforce, Apex, or the point and click editor in Salesforce.

“Plural Label” – This is the plural name of the object if you wish to create a tab on it. Chances are you will not, so this one isn’t as important as “Label”.
“Starts with a vowel sound” – If the name starts with a vowel sound, and this is necessary for most languages to label the object properly in many instances.

“Object Name” – Along with the “Label”, this is used mainly for API functionality when programming. Even if not programming, the Salesforce engine will still need this to handle it internally.

“Context-Sensitive Help Setting” – This defines what to display when users click “Help for this Page”.

“Record Name” – A database-style field name for page layouts.
“Data Type” – The type of field that will represent this custom object. Examples include auto-numbered fields and text. By default, it should be text.

“Starting Number” – For data types that are auto-numbered, this specifies the starting number to count. The default should be 0.

“Allow Reports” – This allows the data in this object to included when reports are generated from pages and tables that contain it. It is usually a good idea to turn this on.

“Allow Activities” – This allows other users to associate tasks and calendric events to this custom object. You may or may not wish to allow this, depending on the object and the users who have access to the account.

“Allow Divisions” – If your company has divisions set up in Salesforce, this will allow the custom object to be available for the divisions that exist. This should usually be enabled.

“Track Field History” – This allows your organization to track changes to the contents of any given instance of this object in tables and pages. Such things as who changed data, who modified the object, and when are common data in this tracking.

“Deployment Status” – Determines whether other users may see this custom object or not.

“Add Notes & Attachments” – Allows users to attach notes to records using this custom object.

“Launch the New Custom Tab Wizard” – If enabled, the wizard will launch to create a custom tab for this object after you save it.

Step 4 – Click “Save”.

Please refer the below link for better understand and screenshots.

http://www.salesforcegeneral.com/salesforce-articles/custom-objects-in-salesforce.html

Hope this helps you!
Best Regards,
Jyothsna