(Migrated from 6 years old blog) Layers are like stacked, transparent sheets of glass on which you can create images. You can see through the transparent areas of a layer to the layers below. You can work on each layer independently.
In above Image, all the layers are visible i.e. Image, Green Rectangle and Text on it... Notice that all layers are selected on right side of above image. This is a screen shot of Adobe Photoshop Elements Editor. Top three images have transparent area thats why other layers below it are visible... If would have used image as the top most layer, it would have no rectangle or text...
In above screnshot, I have unchecked top two layers and now only image is visible... That effectively means that elements on unchecked layers will not be visible in ultimate view...
Middle Layer selected: That why only Rectangle is shown. Background like this with small white and grey squares mean transparent area... Final result would be a green rectangle...
Only Top Layer Visible : Only text is visible now...
Top is unchecked thats why we see blank rectangle above actual image.