If your pattern has seam allowances, please note them down or cut them off (of your working pattern, not the original). They will affect your final measurements. You can use the method below while leaving on the seam allowance, but remembering they are there is important so that you can still measure your desired lengths and, of course, assemble the pattern correctly when you are done.
Before you start out, trace your original pattern onto paper of some sort to create your 'working pattern'. Gather sticky tape (or glue), scissors, a straight ruler, a french curve (or curve square) if you can, and a pencil.
Here is my generic version of a shirt pattern front piece:
Now to shrink the pattern there are several points which you are going to want to take in. Because children grow at different rates, their chests do not expand as fast as they lengthen, we can not just make the whole pattern smaller. Generally, though, for each size smaller take off:
1/2" of the chest (which is 1/4" off a pattern that is cut on a fold)
1/8" of armhole
1/8" of the shoulder
2" of length
Exact measurements will help you out to fit a specific child.
I will start with one area to take in and show how each point can be done using the same general method. Beginning with shortening the armhole, take your your ruler and draw a line perpendicular to the curve as shown below.
Cut along your drawn line to separate the pattern into two pieces.
Bring the pattern together again by overlapping the pieces, shortening the overall armhole to the desired length. Use the straight center line to align the pattern pieces correctly. Tape the pattern together into the new configuration.
You'll note that the armhole curve is now a bit choppy, which is easily adjusted by re-drawing the curve with your french curve (or eyeball it, it'll be fine). Tape a separate piece of paper behind the pattern if you require a bit extra, draw the corrected curve, and cut it out again.
To shorten the overall length of the pattern, choose a point along the side below the armhole and draw another perpendicular line.
Cut and separate:
And rejoin to form the desired length, once again noting the center straight line and making sure that is all even up.
Correct any choppy lines with a ruler.
The shoulder is narrowed in the same way.
You'll note that above I demonstrated each adjustment individually from the original pattern, but yours, of course, will have alterations as you go which will affect the overall size and look. Here all the steps are again, this time with the changes intact.
The sleeve piece is adjusted in the same manner, cutting perpendicular to the curve and adjusting the width.
To make sure you have the correct length of shoulder curve, use a flexible tape ruler to measure it and compare it to your armhole curves on the front and back pieces (keeping in mind to minus any shoulder seam allowances if they are on the pattern).
The french curve is particularly helpful for sleeve curves, however, you can still easily wing it if you do not have one.
The back piece of the pattern can be done in the same way. This is also a great method for making single adjustment in width or length for your children who do not fit the mold (and whose does?). To enlarge a pattern the same method applies, except instead of bringing the pieces together, you separate them to the desired size, using another sheet of paper behind to make up the difference.
I can tackle specific pieces in the comments section if you have questions. This is a rough outline to adjusting pattern sizes and each specific pattern will have its own quirks. As always, whenever you make a new pattern, try it out the first time on broadcloth or inexpensive fabric, not the good stuff. Just, you know, in case :)