How to record an invoice payment for which client received cash but just pocketed the cash instead of depositing?

The Deposit screen, bottom left, has "Cash Goes Back to" and select Owner Draw or Shareholder Loan, from here.

You don't need a clearing account. Use the bottom of the deposit screen to end with a Net 0 deposit. Using UF is fine.

I did this exactly but made it a sub account of owners equity and called it Distribution is that ok or do i need to change it to owners draw?

When using equity sub accounts do it this way.
1. top level Overall Equity not posted to, only acts a summing account
1A Owner Equity - this is where retained earnings post and at year end (actually 1st day of next year) the other two sub accounts are rolled up to so they start fresh
2A Owner Draw
3A Owner Contribution

You can call them by other names but the concept is the same. Draw is personal money or goods taken out or personal expenses paid with business funds. Contribution is money or goods placed into the business from personal sources. Overall Equity is your current valuation of your investment

Two methods to achieve same results.

You can turn off the feature that automatically posts payments to Undeposited Funds and then you can direct any received payment to any Bank account of choice.  You may need a clearing bank account in any event as you cannot post a deposit to an equity account (owner draw).. So either post the payment into cash clearing or leave it hit Undeposited Funds and then deposit to Cash Clearing. Write a check from Cash Clearing to Owner Draw.  But in th eend you MUST receive the payment in order to clear to A/R invoice as paid