An Unspent Transaction Output or UTXO is how Bitcoin is chopped up in your wallet, much like fiat bills.
Imagine that you receive a $100 bill. This is 1 bill. You can see it in your wallet. You can get different kinds of bills with different denominations, 2x$20, 3x$5, 1x$50, and 1x$100. This is much like a UTXO. You can see it in your wallet and if you have several UTXOs they all show up in your wallet. Like fiat bills, they all add up to give you your total that you have in your wallet.
Just like bills, you rarely have the exact denominated bill when you’re going to purchase something and therefore you give the person a bill that has a higher dollar value than what you are purchasing. Sometimes you need to combine multiple bills in order to add up to the purchase price. You are then given back change that you put back in your wallet.
This analogy is the same thing that happens with Bitcoin and UTXOs. You must spend your ENTIRE UTXO (or bill), and you receive change in the form of another UTXO, minus the cost of what you are purchasing and a small fee for doing the transaction.
Example: You want to buy an $88.40 pair of shoes. You have a $50 and 2x$20 bills in your wallet (plus other denominations noted above). When you reach into your wallet and pull out the $50 + $20 + $20, you’ve pulled out $90 and you give the bills to the person you are buying from. They then take that money and give you your change back – $1.60.
If you were taking this example and operating in Bitcoin, you would have a 0.00050000 UTXO, a 0.00100000 UTXO, and maybe 0.00035000 UTXO. What you’re purchasing is translated into 0.00065305 Bitcoin. You have some options. You can choose to use the 0.00100000 UTXO which will cover it all, or you can combine the other 2 UTXOs together to pay the person. How Bitcoin differs from traditional fiat currencies is that the more UTXOs used, the higher the fee to make the transaction. Another way Bitcoin differs from how you make a transaction in fiat is that the full UTXO is not given to the person who you are purchasing from but rather the person always gets EXACTLY what they are asking for and YOU give yourself change. The Bitcoin transaction is created by you that says pay this person this amount, put this back into my wallet, and give this fee to whoever confirms this transaction. In this way, the “change” never leaves your wallet.
Just like with fiat currency, if you pull out a $100 bill to pay a $0.88 product, you are letting the person on the other side know that you have $100. That may not seem like much but if there were a $1000 bill or a $10,000 bill, you would be showing them that you have that amount of money in your wallet. This holds true for Bitcoin too. If you pay a transaction with a UTXO that has 4.30583029 Bitocoin, you are showing the person on the other end of the transaction that you have that amount of Bitcoin because everything in the transaction is public.