Bone is formed through a process called bone ossification. There are two bone formation processes - intramembranous ossification and endochondral ossification. 

Intramembranous Ossification

Intramembranous ossification begins in utero during fetal development and continues on into adolescence. In this process compact and spongy bone develops directly from sheets made of undifferentiated mesenchymal connective tissue. Flat bones of the face, cranial bones, and clavicles or collar bones are formed via intramembranous ossification. 

Bone develops and grows in 4 stages in intramembranous ossification: 

1. Mesenchymal cells in the embryonic skeleton cluster together and start differentiating into specialized cells. Some differentiate into capillaries, while others differentiate into osteogenic cells and then osteoblasts. Early osteoblasts appear in a cluster of cells known as the ossification center. 
2. The newly formed osteoblasts secrete an uncalcified matrix composed of various organic molecules and collagen precursors. The matrix entraps osteoblasts, converting them into osteocytes, while the osteogenic cells in the surrounding of the connective tissue differentiate to form new osteoblasts at the edges of the growing bone. 
3. Several osteoid clusters unite around the capillaries forming a trabecular matrix. Osteoblasts located on the surface of the newly formed spongy bone becomes the cellular layer of the periosteum. 
4. The periosteum secretes compact bone superficial to the spongy bone, which crowds surrounding blood vessels, eventually condensing into red bone marrow. 

Endochondral Ossification

Endochondral ossification is a process by which bone develops by replacing hyaline cartilage. However, bone does not develop directly from cartilage. In the endochondral ossification process, cartilage serves as a template that is completely replaced by new bone. Long bones and bones at the base of the skull form through the process of endochondral ossification.