Chelsea defender Terry, 31, is accused of calling Anton Ferdinand a "f****** black c***" during a Premier League game on October 23 last year.
He denies a racially aggravated public order offence, saying that he was sarcastically repeating the slur that Ferdinand mistakenly thought he had used.
On Wednesday Cole, also 31, told Westminster Magistrates Court: "I think we shouldn't be sitting here."
He said that while racism should never be tolerated, repeating what you thought someone said was 'completely different'.
Cole said: "If I repeated something that I thought you said, that's totally different than if someone just says something."
Cole described Terry as "a close friend", with whom he had played at Chelsea and for England for six or seven years.
But he said there was a "conflict" because he is also friends with Ferdinand and his brother Rio.
He was asked by George Carter-Stephenson QC, for Terry: "Did you want to get involved in the situation?"
The barrister asked about a statement Cole made after the match.
Mr Carter-Stephenson said: "When you made the statement what was in your mind?"
Cole replied: "The FA summoned me to do it."
Mr Carter-Stephenson continued: "Did you feel there was any conflict?"
Cole said: "Yeah. JT is my team-mate and friend; Anton and Rio and his family, I've known for a long time."
He said Terry would laugh off taunts on the football pitch.
"He would probably laugh about it, it's part and parcel of the game and you get used to it."
When asked to describe Terry as a football captain, he said: "He's one of the best, very inspirational."Cole said on the day of the match at Loftus Road, he saw Ferdinand make a fist gesture to imply sex and could see him saying something about "Bridgey" or "black".
"I can't make out - him either saying Bridgey (Cole made the fist gesture) or black."
He said he thought QPR centre-half Ferdinand's taunts were "not necessary" and did not shake his hand after the game.
He did not hear Terry say anything in reply to the goading, the court heard.
Later in the game, Terry told Cole he thought Ferdinand had accused him of using a racist obscenity.
After the match, Cole was present when Terry asked Ferdinand what had happened
"I think John said 'Did you think I called you a black c***, did you think I was being racist?' Then I said 'Did you think John was being racist? Anton said 'No, no'."
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The two players then shook hands and went their separate ways.
Former Chelsea manager Jose Mourinho provided a written character witness statement.
In it he said Terry had an excellent relationship with all the players regardless of ethnicity when he was at the helm between June 2004 and September 2009.
Mr Mourinho, who manages Spanish champions Real Madrid, said Terry played a leading role in off-field programmes such as championing the FA's anti-racism campaigns and Help For Heroes projects.
He said: "I never once witnessed any demonstration of racism or racial abuse or behaviour.
"I am certain that John Terry is not a racist."
A statement was read to court, copies of which were signed by Terry's team-mates, including Frank Lampard, Fernando Torres and Petr Cech, which said: "I have never heard John Terry use any form of racist language and have never heard any suggestion that he may have done so."