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A three wire 120/240 volt system is created by centre tapping a 240 volt coil. The two lines of the 240 volt secondary coil of a distribution transformer are designated L1 and L2. The centre tap of the 240 volt coil is designated N which stands for neutral. The neutral centre tap is grounded to zero potential earth. As the 240 volt coil is centre tapped it splits the coil into two equal halves. This creates a condition, by having the two coils in series with each other that the total 240 volts is also split into two dropping 120 volts across each coil. From L1 to N is equal to 120 volts. From L2 to N is equal to 120 volts. From L1 to L2 is equal to 240 volts. In North America this is the voltages that are used in home wiring. By centre tapping this secondary transformer coil it allows appliances of both 120 and 240 volts to be used simultaneously to operate in the home. Larger wattage demand loads are connected to the 240 volt connections while smaller appliance wattages are connected to either of the two 120 volt connections.
As you state only two wires completes a circuit but by this type of connection twice the amount of circuits can be obtained at the 120 volt level. On a distribution panel of 40 circuits you can have 40 - 120 volt circuits or 20 - 240 volt circuits or any combination of the two depending on the specifications of the equipment to be connected.
