Our sister encyclopedia, Encarta, informs us that "There are four main kinds of abbreviations: shortenings, contractions, initialisms, and acronyms." 
Using the initial letters of each word
So-called Initialisms are a form of abbreviation in which a phrase is abbreviated to the first letter of each word in the phrase; familiar examples include
- CPA, for Certified Public Accountant
- CBS, for Columbia Broadcasting System
- KJV, for King James Version.
Initialisms are distinguished from acronyms in that initialisms are pronounced as individual letters, while acronyms are pronounced as if the letters spelled out a word (which they may in some cases do). As Encarta says, "Acronyms are initialisms that have become words in their own right."  The use of the word "acronym" to include initialisms is increasingly accepted.
Both initialisms and acronyms are defined by custom; sometimes they do not strictly follow the rule of using every initial, or only the first initial. Unimportant words may be omitted. In the case of acronyms a certain amount of creativity may be employed.
- FBI, for Federal Bureau of Investigation'
- AFL-CIO, for American Federation of Labor and Congress of Industrial Organizations
Examples of acronyms include:
- USA PATRIOT Act, for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act
- TULIP, for Total Depravity, Unconditional Election, Limited Atonement, Irresistible Grace, and Perseverance of the Saints (the core tenets of Calvinism).
- Roy G. Biv, for Red, Orange, Yellow, Green, Blue, Indigo, and Violet (the conventional description of the colors in the spectrum).