My understanding. Is it correct?

[eluser]Natebot[/eluser]
Access to your hostings file system differs from host to host, but I favor placing both the application and system folders outside of the Web root when I can. Some developers don't get that choice as the hosting company only lets them add files to their Web root and not outside it.

In your case it would be a structure like:
./application
./system
./public_html

./public_html is still the web root, and you'd place the index.php file somewhere inside public_html, either at the web root level (if www.yourdomain.com is your app) or deeper (if www.yourdomain.com/something/ is your app). In either case you just adjust the paths in the index.php file to point to the location of the application and system directories.

I also create an extra directory ./data
which is where I store my system logs ./data/logs/sys_logs/
and my CI caches ./data/cache/DBcache/ ./data/cache/PageCache/
(update ./application/config/config.php and database.php to point to those directories)
This means the /system directory has no generated cache and log content and I can replace it at will with new versions. In fact I can have multiple (system164 & system171) and use a symbolic link to toggle between them.

Nothing wrong with what you are doing, I just wanted to mention how flexible the install can be. Once you get some experience you're bound to find an install pattern that suites your needs.