Wet sanding (for smaller repairs) is generally preferable to dry sanding. Rinse the dust out of the sponge as needed. Your clean-up efforts will be expedited by your dust management (and your own nostrils will appreciate the safety factor, too).
Available BY NAME at any Ace, True Value or Do-It-Best hardware store is the Wall & Ceiling Repair Kit For Dummies. You'll find a good explanation of both dry and wet sanding as well as dozens of other tips in the color-coded, photographic, poster-style instructions that come with the kit...written with famous For Dummies clarity. Kit handles minor surface repairs (dents/dings, nail holes, cracks and holes up to 12 inches square) and provides outstanding instructions that you can use again and again. Designed for the novice level DIYer. Can also purchase online via these same hardware stores.