Charles Lee Ray, a well-known serial killer and wanted fugitive, is seen running through the streets of Chicago. After he is fatally shot in a toy shop by a detective named Mike Norris, Charles transfers his soul into one of the 'Good Guy' dolls via a voodoo spell. This causes the shop to explode, and Mike find Charles's body.
The next day, a widow named Karen Barclay purchases the same doll (now known as Chucky) for her son Andy's sixth birthday. That night, Karen's co-worker and friend Maggie Peterson is killed when Chucky causes her to fall from the apartment window while she babysits Andy. Maggie had stopped Chucky from getting live updates on his ex-henchman Eddie Caputo, who abandoned Charles when he transferred his soul; she mistakenly thought Andy was disobeying her by not going to bed. As a result, the police search the apartment. Andy is deemed a suspect by Mike much to the annoyance of Karen, who orders Mike and the police to leave.
The next morning, Chucky orders Andy to skip school and take the train downtown. While Andy is urinating, Chucky sneaks into Eddie Caputo's lair, turning off a stove's pilot light but turning up the gas. Chucky toys with Eddie, who accidentally kills himself by shooting the stove, resulting in an explosion. Andy, once again a suspect, is placed in a mental hospital by Dr. Ardmore until further notice. That night, Karen discovers that Chucky's batteries were never inserted, and that Andy was telling the truth about Chucky functioning on his own power. While she is inspecting the doll, Chucky comes to life, bites her, and escapes. After almost being killed by Chucky in his car and shooting him in the process, Mike finally agrees to help Karen.
Chucky goes to John, Charles Lee Ray's former voodoo teacher. When Chucky asks why he is able to bleed, John informs him that the longer his soul remains trapped within the doll, the more human the doll will become; in order to escape the doll's body, Chucky must possess the first person to be told of his possession with that being Andy. When John rejects Chucky's plea for help, Chucky fatally stabs John using his own voodoo doll. Chucky escapes just before Karen and Mike arrive on the scene. Before dying, John tells them that although Chucky is a doll, his heart is fully human and vulnerable to fatal injury.