I stink at sewing, but this is what I do:
-Cut out a piece of fabric that's about the same size as size of the bag. I've sometimes traced the bag before seaming it to get the measurements close.
-Fold the fabric in half, and seam it along each side with the right sides of the fabric facing in, but leaving a bit of fabric (1/2 inch or so?) un-seamed at the top for the next step.
-Fold each side of the top down a bit towards the outside of the pouch that I just created, so that you can see the right side of the fabric along the top edges. Then sew them this way so that the top of the lining has a nice edge.
-Put the lining inside the bag, and sew it in using a regular needle and thread. I just use a (pretty uneven) whipstitch around the top, though there's probably a neater way to do it. The stitches won't show much (if at all) in the knitting. I stop often to check that I'm sewing it in evenly. The corners can be a bit of a pain when you're doing this, but I don't fuss over getting them too neat because there probably aren't too many people who are going to be looking at the corners of my lining.
The last bag that I lined is here, there's a photo of the lining but it's not close enough to show tons of detail. But that'll give you kind of an idea of what I'm talking about.
Of course, I've only ever lined simple bags of the "knit and fold in half" variety, making a lining for one with more shape to it would be more complicated. And I also don't put much effort into making it super-neat looking, because I don't know enough about sewing to do more than just get it done! Hopefully someone who knows what they're doing can give us tips on those things.