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Payments
Please Learn from the input here. You have given Bad Guidance. The use of AR for the Deposit is not right for what is being reviewed.
The Sales Receipt entry for managing Funds prepaid means you use the same prepayment item and amount on the Credit Memo. This clears your liability account, if that is what you are allowed to hold prepayments as. Or, it offsets that this was already treated as income when you got it, for a cash basis tax reporting entity.
Nothing here is also AR, manually. And using AR in "deposit entries" is Wrong for both cash and accrual basis tax entities.
Yes, you Apply the credit memo to the invoices. For this:
"When I google how to apply a credit memo to an invoice it says to apply it as a payment. But then the customer does not see the deposit they paid on the invoice to reduce the amount due. I do not understand why this is a good idea."
You likely need to Customize your Invoice template; Intuit tends not to make them meet our needs. You need the Footer to show the following:
Total <== this sale
Payments/Credits Applied <== the CM prepaid value will show here
Balance Due<== eventually goes to Zero.
And you can use Statements. That would show, for instance:
Invoice $5,000
Credit Memo -$2,500
Which explains why the Footer on the invoice also shows they still owe $2,500 for that partially prepaid sale.