The early years of life are characterized by dramatic developmental changes. Within this important time period lies the transition from newborn to childhood. Sleep is one of the primary activities of the brain during early development and plays an important role in healthy cognitive and psychosocial development in early life. This paper will first review the normal sleep characteristics and their development in neonates and children, including architecture of sleep, development of a healthy sleep rhythm in early childhood, sleep recommendations and cultural disparity, as well as important factors for establishing a healthy sleep pattern during the first years of life, such as regular and consistent bedtime routine, safe and comfortable sleep environment, and appropriate sleep onset associations. This paper then provides recent updates of evidence of the effects of sleep on early brain development, particularly on learning and memory, emotional regulation, and general cognitive development through behavioral and neurophysiological studies. As regards the mechanism, many experimental sleep deprivation studies in animals and adults have attempted to explain the underlying mechanisms of sleep on cognition and the emotional brain. Future studies are expected to delineate the effects of sleep on brain structural and functional networks in the developing brain with the marked development of image acquisition approaches and the novel analysis tools for infants and young children in recent years.