Could someone explain to me what SAP instance is? Is it also installed on the SAP application server?
4 Answers
The role of a SAP instance is to deliver SAP Processes (DIA, BGD, UPD, ...).
A SAP System (SID) can be made of 1 CI (Central Instance) and 1,n DIALOG instances.
You can get the list of SAP Instances using of your SAP System using SM66 t-code.
CI (Central Instance) hosts Enqueue and Message server.

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The term instance is used in SAP when you have a lot of clients.
If you see ADM100 pdf manual, they specify an instance as a group of multiple clients(more than 50...).
Don't confuse an instance with developing a program, they are two different things.
Call it server,call it client,you can install SAP on a machine.
Machine,Server, Client, they are the same, but are used in different contest.
Also you could have a single machine with a lot of instance virtualized, where in every virtual system is installed sap, then you could say that this machine holds an instance.
Be careful Dirk,On a sap system you can have Abap based sap systems or Abap+Java based sap system, I would be careful to use the word instance.

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Sanaz, In addition to the responses of Dirk, Admin2017 and Fedoco, I can advise SM51 t-code.
AS (Application Server) Instances of SAP Server.
You can find in this transaction information about:
- Application Server Instance (or Instances),
- Host (server address)
- Instance Services (List of instance services)
- State (eg:Active)

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In SAP environments, an Instance
usually means a SAP Netweaver
instance. Netweaver
is the server software that runs SAP applications like ERP, CRM, PI and others, both Java
and ABAP
. You can have several instances configured on a single server - they share a few common directories, other directories are instance specific. A Netweaver
application server would be one instance running on your server.

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1Sorry to say, but this answer is wrong. An instance may comprise multiple application servers. – vwegert Nov 28 '15 at 16:07