A skin is like the wrapping party of an object. Everything in Warcraft III is an object. Each object has what is called a model, which is like their framework. The skin is what goes on the outside of the framework, what you see, like the paint on the outside of a house. I'm not sure what programs you use to edit or make skins, but if you do, you can make existing units look different than what they look now.
Units can be made using the Object Editor in the World Editor.