When do I use it's?

I have this problem that whenever I come to something owning something, Microsoft says it's wrong.
For example: is it- it's sheath was silver
or - its sheath was silver
I have a feeling it is the first one, but when I type it up in Microsoft the little blue squiggly line appears under 'it's' and corrects it as 'its.'
If it is 'it's' than I may have a lot of mistakes to correct.
Advice on this would be a big help as I am very confused with this issue, I have looked up the meaning of 'it's' and it says 'it is' or 'it has' but I just want to confirm that 'it's' write so I can stop worrying and finally fix some of my mistakes.
Thank you!

"It's" must make sense as "it is" in the sentence. Because the apostrophe denotes a missing space+i.

"Its" is the same as "his" or "hers" only for objects. It is possessive.

Therefore, the second one is correct. "its [object it is referring to] sheath was silver."

A sentence where "it's" would make sense is: "it's [it is] a silver sheath."

Does that help?

It's simple!

It's
Contraction; meaning "It is"; used in a sentence: "It's a blustery day today."

Its
Possessive; meaning "it owns x"; used in a sentence: "I love the sun; its light is refreshing and warm."

Thanks guys, that makes so much more sense! I shall make sure I use them correctly and I'll fix all of my mistakes. XD
Oh and thank you for such quick replies!!

Also keep in mind that although it is important to know these definitions, as writers, we are allowed to slightly bend the rules in the effect's favour. For example, if you are writing about a monster, I think that the proper thing would be to say 'its eyes', but to convey a feeling of abnormality and monstrosity, you might want to convert it to 'it's eyes'. I just hope I'm correct. Might not be the perfect example. But anyway, I believe this might apply in some cases.

Drak- The principle still stands that the sentence has to make sense with "it is" inserted. That is what the apostrophe translates to, regardless of "bending the rules."

That example does make sense for creepy, though, as it reads as "it is eyes." But something like "it's sword" does not make sense, because it reads as "it is sword." "It's a sword" does make sense.

Bending the rules more applies to sentence structure/fragments instead of small things like that. Small things tend to read like actual errors instead of stylistic choices.

Perhaps then I have misinterpreted something... Sorry, what I meant was not 'It is eyes' but 'the eyes of IT', basically IT's eyes. Perhaps that would work more.

That is what "its" is for. It is the possessive form of "it".

A full (correct) sentence using that example would be "its eyes were silver."

Because "it's" always means a contraction of "it is", "its" means the same as "his" or "hers". And yes, "hers" is grammatically correct. Source.

I am not sure I understand... You said that it's means 'it is eyes.', but what I am talking about is an alternative to 'its' in a manner more suitable for horror, in which case I would use it's. As I see it, this is basically similar to the contrast the contrast between "something' and "some 'thing'". Am I wrong in this?

I believe you are. I've only ever heard one use for "it's": "it is".

If you had someone name It, it's reasonable to use an apostrophe, since It is its name. But, it would be super confusing... and why would you want to name something It in the first place? XD

I looked at It and waved. It smiled and waved back. Then It came forward. "Hi, my name is It!" It said.

"I know," I said, looking into It's eyes.

In that case, it would be appropriate! But anything else? Probably not.