Basically it's because "it" is a pronoun, so the possessive acts like his and hers.
Eeyore lost his tail
The gloomy plush donkey lost its tail
Oh, look, it's (it is) hanging by Owl's door!
Basically it's because "it" is a pronoun, so the possessive acts like his and hers.
Eeyore lost his tail
The gloomy plush donkey lost its tail
Oh, look, it's (it is) hanging by Owl's door!