This chapter provides an introduction to the role of a financial system in an economy. It presents a very simple model of an economy and establishes some of the basic financial concepts which will be drawn upon throughout this book. In this model the economy is divided into two distinct groups or sectors. The first is the household sector and the second is the firms sector. The chapter examines the nature of the financial claims which underlie the transfer of funds from those with surplus funds to those who wish to borrow. It also provides a sectoral analysis of the financial system, focusing on households, non-financial corporations, financial corporations, general government and rest of the world. The chapter discusses three sets of national accounts that are relevant to the analysis of the financial sector: national wealth, financial wealth and flow-offunds accounts.