Jesse Aarons (Josh Hutcherson) is a fifth-grader and an aspiring artist living with his financially struggling family in Lark Creek, Virginia. He rides the bus to his elementary school with his little sister May Belle (Bailee Madison), where he avoids the school bully, Janice Avery (Lauren Clinton). In class, Jesse is teased by classmates Scott Hoager (Cameron Wakefield) and Gary Fulcher (Elliot Lawless), and meets a new student his age by the name Leslie Burke (AnnaSophia Robb). At recess, Jesse enters a running event, for which he had been training at home. Leslie also enters and manages to beat all the boys, much to Jesse's irritation. On the way home, Jesse and Leslie learn that they are next-door neighbors.
Later in the evening, Jesse becomes frustrated when he finds that May Belle drew in his notebook, but his mom (Kate Butler) who favors her daughters and his strict father (Robert Patrick) sides with her. He later watches them gardening together, disappointed that his father never spends time with him. The next day at school, Leslie compliments Jesse's drawing ability after seeing his notebook, and they soon become best friends. Every day after school they venture into the woods and swing across acreek on a rope. Jesse and Leslie find an abandoned tree house and a broken down truck on the other side, and invent a new world, which Leslie names "Terabithia". The fantasy world, which is a reflection on their lives, comes to life through their eyes as they explore the surroundings and spend their free time in the tree house getting to know each other, ruling Terabithia as King and Queen.
Leslie gives Jesse an art kit for his birthday, much to his delight. Later, he gives her a puppy, whom she decides to name Prince Terrien (P.T. for short). Once in Terabithia, they fight with various creatures, including a troll resembling Janice. In one particular scene, Leslie walks onto a log and shouts "We rule Terabithia and nothing crushes us!" At school, Janice puts a fee on entering the girls' bathroom. Leslie becomes frustrated by her fee and she and Jesse play a prank on Janice. Once Leslie's parents finish writing their book, she and Jesse help paint a room in their house. Jesse is impressed by her parents' happiness, and smiles as he watches their family. At school on Friday, Leslie hears Janice Avery crying in the bathroom. After Leslie talks with her, she discovers that the reason why Janice is a bully is that she has an abusive father, and they become friends. Jesse and Leslie then take P.T. to Terabithia, where they fight off several creatures resembling students at their school. They decide to go home when it starts raining and the creek gets higher than ever, and Jesse realizes that he has started having feelings for Leslie as she runs back to her house, for the last time.
The next morning, Ms. Edmunds (Zooey Deschanel), Jesse's music teacher, whom he secretly loves, calls to invite him on a one-on-one field trip to an art museum. Jesse asks his mother's permission; however, she is half-asleep and he takes her mumbling as approval. Jesse does not ask Leslie to accompany him, and merely looks at her house as they drive by. When he returns home, Jesse finds that his father and mother are worried sick because they did not know where he was. His father tells him that Leslie died after drowning in the creek after falling in and striking her head, because the rope she tried to swing on broke the morning that Jesse went to the museum. The family therefore thought that Jesse had drowned too. Jesse is heartbroken, and says they're lying, he does not want to accept the fact even though he sees paramedics and detectives at Burke's place.
Jesse and May belle re-imagine Terabithia in a greater splendor, with Jesse as king and May Belle as princess.
The following day, Jesse and his parents visit the Burke family home to pay their respects. Leslie's father, Bill Burke (Latham Gaines), tells Jesse that she loved him, and thanks him for being a very good friend to her, since she had trouble making friends at her old school. Jesse feels overwhelming guilt for Leslie's death because he didn't invite her to the museum trip and for not being there for her. He runs back into the forest (even pushing May Belle when she tries to support him), and breaks down in tears. His father tells him that it's not his fault and says, "She brought you something special when she came here, didn't she? That's what you hold on to. That's how you keep her alive."
Jesse decides to re-imagine Terabithia and builds a bridge with a sign saying "Nothing Crushes Us" across the creek to welcome a new ruler. He invites his sister May Belle to enter Terabithia; she is delighted because she was previously denied every opportunity to enter. She and Jesse bring back Terabithia in even greater splendor, with Jesse as king and his sister as princess.