ahhh, you have customers - that pay you, and vendors that you pay. you send an invoice to a customer, the vendor sends you a bill (invoice to his customer) makes talking about this stuff a lot easier to understand if you keep those relationships in mind.
So a customer owes you money
You owe a vendor less money
the vendor wants you to apply the vendor bill to the invoice, lowering the amount due
You need to have a cash type bank account or create one
Pay the bill from the cash type bank account
create a credit memo for the customer, use a service item that links to the cash type bank account and enter the amount
in the cash account the payment and deposit cancel (wash), the bill is paid, the customer invoice is less by the amount of the bill