Yes, you simply make it up. The trick is that you not only have to make it all up but keep it consistent and communicate it all clearly to your players. They have to be able to visualize the whole setup of a scene: where everyone is, what objects are there, what opportunities and/or hindrances those objects (may) present to them, what they see, what they hear, smell, and so on (because visually hidden stuff might be hinted at by the other senses, obviously.)
Of course, at the same time, you have to keep it balanced to avoid bogging down your game with listing countless irrelevant details. You'll have to establish a common understanding with the party, learn what your players know about the setting (or its inspiring real-life era and setting), and bring everyone to an equal level... so that when you say "it's an average innhouse" everyone knows what that implies in your world (a stove or two? a fireplace? a bar, or proper tables, or just barrels cut in half, turned upside down for both tables and seating? a few waitresses? barmaids? an innkeeper? lots of large windows, or just a few holes in a several feet wide wall?) ...and so on. Do draw their attention to what's important, what's unusual, sum everything else up, and allow player input based on assumed information (for example, if you haven't mentioned that there's a cellar, but someone assumes there's one, because all the inns they've ever visited had one, let this inn have one as well, and the next time when there isn't one, mention that explicitly.)
Imagine the scene, and communicate it briefly and effectively. If necessary, update your players round by round about the meaningful and important changes taking place -- again, briefly (in a short sentence or two) and effectively. Use your descriptions to establish mood as well -- as that may even influence combat.