Database backup is needed in case the updater process fails for some reason at any point. If we have that backup (database dump), we can revert your old data, fix updater (or data, depending on what failed), and run updater again. Once updater has successfully ran, you can delete that dump, since it will be deprecated. All your data (categories, articles, comments, etc.) are stored in KB's database (named "assistme_assist"). Updater takes care of your data, so you don't have to do a thing in the database. Simply make a backup of your database just for in case of an emergency.
On the other hand, there are KB files on your file system. In your KB folder, you have all KB libraries (files needed for KB to run), plus two things: in folder /Image you will find all images (if any) that you included into your KB articles (when you add an image to your article, it is uploaded to your server into that folder). The other thing is /templates/YOURLAYOUT/ folder, which holds all KB templates. If you changed the look&feel of KB, then you modified these files (to include your site's header, for instance). Whatever Layout you specified in KB in Settings page, that folder is used by KB.
Upgrade procedure is as follows: After you have created 2 backups (ZIP file with your KB folders and SQL file with your KB database backup), you simply have to upload new KB to your server, overwriting all files on it's way. Then you should run updater, which will take care of your database, so KB is upgraded. But, if you made any changed to your templates, they are now overwritten with KB's default templates. In that case, you can not simply take those files from your backup, and return them. The problem is that with every new feature, we have to change templates too so people (admins/public users) can actually see new options, links, etc.
If you modified your templates in any way, you will have to edit the new templates again. You can use your backed up files as a reference.
