Comparing two files (file1.txt and file2.txt) results in the following compare editor. The left side shows the contents of file1.txt and the right side shows the contents of file2.txt. The lines connecting the left and right panes indicate the differences between the files.
You can double click on the editor tab to maximize the editor.
Looking at the numbered changes:
Starting with the top line (in the the left pane) we can see that the difference bar (in the area of the blue circle) indicates something is missing from the very top of the left file. If we follow the difference band (see #1) to the right file we can see that the it contains "This is line 1" .
The next line "This is line 2." is white indicating it matches the right file.
Moving onto the next line (colored in gray) we can see that the left file and right file have different contents for this line (see #2).
The next line ("This is line 4") is once again in white, so we can skip it.
The next line exists in the left file but since it is gray we follow its difference bar to the right (see #3) and notice that the right file does not contain the line (see red circle).