I took another hard drive from an old computer that says its a 120 gig on its label but in my removable drive it only reads 31.4 and says its not formatted yet. I don't understand this.
You installed the HDD in the external drive enclosure right?
OK assuming this is XP connect the external drive to the computer
click My computer
click Computer management shortcut
in the new window on the left side you see Storage
click the plus sign beside Storage if there and a sub menu drops below
if no plus sign then look below and click Disk management
now on the right side all your drives should be listed
Remember C: will be your main drive, D: probably/possibly your recovery partition so anything on the external drive should show as F: and beyond. You likely need to remove a partition and then reformat the whole external drive to get your entire 120 gigs back.
Some hard drives had the option to limit the size, via a jumper, for older systems that couldn't handle larger drives. It's usually pins 5-6 but you probably want to check the manual.