Your dragon is very small, about the size as a hatchling. A bearded dragon typically is about 3-4" long at birth snout to tail. A 5" baby is probably only a month or so old, if feed properly. I suspect your friend either only recently bought the dragon, or has not been feeding it anywhere near enough to allow it to grow.
The size tank you have now is fine for the dragon, at least till he starts to grow. Once he does reach about 12" or more, then a larger tank will be needed.
For now, make sure you have proper heating and lighting, basking temps should be around 100-115F for babies and very young dragons. The basking spot should also alow a slightly cooler area, say around 95F so it could still bask outside of the higher temps. One end of the tank should have temps around 75F-80F with overall ambient temps around 85F. You also need a UVB producing bulb, either the florescent tube style UVB lights (ie Repti-glo or Repti-sun) or Mercury Vapour bulbs (ie Powersun).
Substrate you should just use paper towel to keep things simple. THe book you have about bearded dragons is pretty good, it has the basic info you need for baby bearded dragons.
The website Kate mentioned is good too, for choosing what greens you should offer. Giving the small size of your dragon, I would feed it like a dragon under 4 months, that is, 2-3 feedings of insects (appropriately sized crickets, all they can eat in about 5-10 minutes), dust one feeding of insects a day with a calcium and multivitamine supplements. Make sure the crickets are no bigger than the space between teh dragon's eyes and the crickets have been well fed at least 24 hours before feeding to teh dragon. THis is very important, especially with crickets bought from a petstore or mail ordered. To feed the crickets, just give them the same greens you would feed your dragon, plus carrot, potatoe, orance slice or squash to provide moisture. Fish flakes can be given as well as crushed low fat cat food or powdered skimmilk. This gives protien for your crickets.
Make sure your dragon is well hydrated as well, mist the dragon several times a day or give a bath in luke warm but shadow water (no higher than teh dragon's armpits) If he poops in the bath, take himout, wash and rince the container and soak him some more, if he hasn't taken any drinks before hand. If the dragon looks really dehydrated (ie wrinkly skin, or if you pull the skin back fromthe body and let go, it takes awhile to move back into place or froms little wrinkles). Some pediatrilite or electrolite drops fromthe petstore, can be added to water and fed (either through needles syringe,or with an eye dropper,just dropping a bit on their nose or side of the mouth can get them to drink it). This helps restore lost moisture and electrolites. Gateraid can be used in a pinch.
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PHLdyPayne