Let's start with what the holes in an outlet do. When you look at a normal 120-volt outlet in the United States, there are two vertical slots and then a round hole centered below them. The left slot is slightly larger than the right. The left slot is called "neutral," the right slot is called "hot" and the hole below them is called "ground." The prongs on a plug fit into these slots in the outlet.
The ground slot and the neutral slot of an outlet are identical. That is, if you go back to the breaker box, you will find that the neutral and ground wires from all of the outlets go to the same place. They all connect to ground. Since they both go to the same place, why do you need both?
If you look around your house, what you will find is that just about every appliance with a metal case has a three-prong outlet. This may also include some things, like your computer, that have a metal-encased power supply inside even if the device itself comes in a plastic case. The idea behind grounding is to protect the people who use metal-encased appliances from electric shock. The casing is connected directly to the ground prong.
Let's say that a wire comes loose inside an ungrounded metal case, and the loose wire touches the metal case. If the loose wire is hot, then the metal case is now hot, and anyone who touches it will get a potentially fatal shock. With the case grounded, the electricity from the hot wire flows straight to ground, and this trips the breaker in the breaker box. Now the appliance won't work, but it won't kill you either.
What happens if you cut off the ground prong or use a cheater plug so you can plug a three-prong appliance into a two-prong outlet? Nothing really -- the appliance will still operate. What you have done, however, is disable an important safety feature that protects you from electric shock if a wire comes loose.
The National Electrical Code gives us a couple of choices of how to change these receptacles without doing a complete rewire of the house, according to Mike Holt:
The NEC requires you to install grounding-type receptacles on 15A and 20A branch circuits. Per Sec. 210-7, it also requires you to effectively ground the grounding contacts of those receptacles to the branch circuit equipment-grounding conductor. But, what can you do about old 2-wire nongrounding-type receptacles, where no ground exists in the outlet box?
Sec. 210-7(d)(3) permits any of the following installations when replacing a 2-wire ungrounded receptacle:
(a) Replace it with another 2-wire receptacle;
(b) Replace it with a GFCI-type receptacle and mark the receptacle with the words “No Equipment Ground;” or
(c) Replace it with a grounding-type receptacle protected by a GFCI device (circuit breaker or receptacle). Since the grounding terminals for the receptacles are not grounded, you must mark the receptacles with the words “GFCI Protected” and “No Equipment Ground”. For inspection and replacement of your receptacles call Performance Electric. 941-227-0008