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An understanding of the following definitions will help you plan your build specification and perform the install for releases upto NW 7.0.
The central instance refers to the application services for the SAP system, including the enqueue and message services that are located on a single host machine. The central instance has multiple work processes for the dialog, update, and background services. The machine on which it runs is called the central host.
The instance associated with the underlying database of the SAP application is referred to as a database instance.
If the SAP central instance and the database are installed on the same physical host, it is referred to as a central system installation. Usually, small SAP installations and nonproduction systems are installed with this type.