Armies are the backbone of the military organisation. They allow better command and communications structures, and a realm should strive to use the army system as best as possible, if it wants to be successful on the battlefield.
In a medieval world, every army is sponsored by a noble, usually a lord or government member. New armies can be created at any time, for a small sum of gold. The army sponsor can choose the army marshal (and change him at any time), and he can dissolve the army if he chooses so. He is also the only one who can put money into the army war chest.
The marshal is in charge of the army. He chooses offensive and defensive formations to use in battle, and can update the standing orders. In addition, he can use the "Orders" message type when sending to members of the army.
The Vice-Marshal is responsible for issuing orders when the marshal is incapacitated. He can also use the "Orders" message type when sending to members of the army.
Every army has a war chest, (hopefully) filled with gold. The function of the war chest is to allow the army to operate better, by sharing the financial burden of troop maintainance. As long as there is gold in the war chest, half of what members of the army pay for training and repairs will be paid out of the war chest.
When an army is created, the sponsor must choose a home region for the army. This can either be the realm's capital, the region the sponsor is lord of, or the sponsor's home region if it is within the realm. If the army's home region is successfully TO'd by enemy forces the army is dissolved.
Armies also have it easier to share scribe reports. One click is all it takes and a scribe report is shared with everyone in the army, while the "standing orders" will provide a convenient link to all shared scribe reports.
In addition to the standing orders, every knight who is assigned to an army also has additional messaging options in his normal Messages page, to contact all or some members of his army.
The liege lord of every knight decides which army (if any) to dispatch him or her to. While this might sound weird at first, it is actually very logical - after all, the knight has pledged his services to the liege, and assignment to an army is simply military service. Lords assign themselves in much the same way. Unaligned nobles and rulers are also able to assign themselves to an army.
Check the Command Hierarchy page on information and hints regarding the flow of information and orders within the army.