For example, if X and Y are in a lawsuit, and Z said to X, "The traffic light was green," then X cannot testify as to what Z said. However, if X says to Z, "The traffic light was green," then since X is a party, Z could testify to what X said.

Hearsay is generally not admissible as evidence in common law courts, but the rules for admissibility are more relaxed in court systems based on the civil law system.

The reason for the hearsay rule is that the credibility of the person or his observations cannot be challenged by the person against whom the testimony is being proffered. Returning to the example above, if X were to testify as to what Z said, it is difficult for Y to show that Z is either lying or that Z's observations were incorrect.

While the 'hearsay rule' is commonly thought of within the context of "who said what to whom," in fact it is much more important as to documents and electronic records. For example, many documents and entries on those documents are created by a machine or as part of a process where person who actually created the document is unknown.

While hearsay is generally inadmissible as evidence in legal proceedings such as litigation there are many exceptions, such as (these are just a few, [more need to be added]):

• dying utterances: often depicted in movies; the police officer asks the person on their death bed, "Who did it" and the victim replies, "The butler did it");
• admissions against interest: someone makes an admission, such as someone confessing to a crime
• the business records exception: business records created during the ordinary course of business are considered reliable and can usually be brought in under this exception if the proper foundation is laid when the evidence is introduced into evidence. In this usage, business records has a very broad meaning and includes police records, or records of non-profit organizations.
• prior testimony: if the testimony was given under oath and the party against whom the testimony is being proffered was present and had the opportunity to cross examine the witness at that time. Often used to enter depositions into the court record at trial.

In some jurisdictions such as Canada the limited exceptions format to the rule have been replaced by a more general theory of exceptions to the hearsay rule that allows courts to decide when documents, testimony or other evidentiary proof can be used that might not otherwise be considered. [more can be written about this].

Today the hearsay rule has developed into a complex set of evidentiary rules of admissibility that are used to prevent various types of statements and documents from being entered into evidence in various types of court proceedings, though they may be allowed in other types of alternative dispute resolution. Generally speaking hearsay is a concept that developed in the common law legal tradition in the context of the adversarial system of decision making.