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You can create a logo using any image editing software that allows you to save files in .png format.[1]
Image size
Logos can have a maximum height of 155 pixels - anything more than this will get cut off.
Logos are centered vertically and horizontally in the display area, so smaller logos are entirely feasible.
File format
Save the image to your hard drive in .png format. (Note that the ".png" file extension must be in lower case. If it is saved as .PNG you should rename it before uploading it.)
↑You can use programs such as Photoshop, Fireworks, Photo-Paint, PaintShop Pro, Inkscape, and similar applications to create .png files. If you don't have an image editing program already, The GIMP and Paint.NET are free open-source tools.