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The magic of public key crypto is that you can give somebody your public key, some data, and a signature, and they can be certain that:
a) that particular signature could only have been created by somebody that has the private key that corresponds to the public key
b) the data hasn't been changed in any way
They don't need to know the private key-- you keep it secret.
The "hash over..." bit is the way digital signatures work-- you sign a hash of the data, and not the data itself, because the hash is much smaller.
The "...simplified version of the transaction" bit is complicated. The data signed is the transaction minus all it's scriptSig signatures, plus (almost always) the previous transaction's scriptPubKey. See the OP_CHECKSIG page on the wiki for all the gory details.