As you can see there are 2 main circuits here. The first one is the main circuit, looping over the radiator in the nose of the car. The second circuit is the heater circuit. Both circuits have their own outlet on the engine.
When the water is cold, the thermostat will be closed, blocking off the main circuit. The pump will now be pumping all the water through the heater circuit, which acts as the bypass circuit for the main cooling circuit. So it is very important to never close of the heater circuit.
The heat remaining in the water after having been through the heater circuit is inserted just behind the thermostat. The increase in temperature will allow the thermostat to eventually open and let in water from the main cooling circuit, which is then pumped through the engine again. There will now be flow through the main cooling circuit, as the thermostat is now opened. When the cooler water temperature of the main circuit reaches the the thermostat it will close again.
Interesting is the location of the coolant temperature sensor. It is not located in the main cooling circuit as you might expect. It is inserted in the engine outlet for the heater circuit. So the temperature you see on the dashboard and the temperature the engine management uses to regulate the engine is actually the heater outlet, not the main cooling circuit.
Another thing which is explained by this setup, is the effect of the heater on coolant temperature. When you set the heater to hot, the water in the heater is cooled down (heat is transferred to the air entering the cabin). So colder water is returned behind the thermostat, which will make it close. Less cold water will enter the system and the temperature sensor will register slightly increased water temperature.
