Two-dimensional transition metal dichalcogenides (2D TMDs) are a promising class of functional materials for fundamental physics explorations and applications in next-generation electronics, catalysis, quantum technologies, and energy-related fields. Theory and simulations have played a pivotal role in recent advancements, from understanding physical properties and discovering new materials to elucidating synthesis processes and designing novel devices. The key has been developments in ab initio theory, deep learning, molecular dynamics, high-throughput computations, and multiscale methods. This review focuses on how theory and simulations have contributed to recent progress in 2D TMDs research, particularly in understanding properties of twisted moiré-based TMDs, predicting exotic quantum phases in TMD monolayers and heterostructures, understanding nucleation and growth processes in TMD synthesis, and comprehending electron transport and characteristics of different contacts in potential devices based on TMD heterostructures. The notable achievements provided by theory and simulations are highlighted, along with the challenges that need to be addressed. Although 2D TMDs have demonstrated potential and prototype devices have been created, we conclude by highlighting research areas that demand the most attention and how theory and simulation might address them and aid in attaining the true potential of 2D TMDs toward commercial device realizations.