I want a custom made form to be displayed when user clicks on add item. I don't want the default form to get displayed but instead I want custom made form to be displayed and used for updating lists or library. How can I do that?
You can create a custom new form through SharePoint Designer and set it as the default new form. This will enable SharePoint to open the custom form when you click on Add item link.
Another approach is to customize the list form through InfoPath Designer
If you're a beginner, the easiest way is through InfoPath. The path to get there depends on your version of SharePoint (wasn't indicated in your question). Just google something like... SharePoint (version year) InfoPath custom forms tutorial