QB Issue Resolution:

use receive payments for that invoice, then deposit those funds to a cash type bank account

 

then use pay bills, set the pay from account to the cash type bank account and enter the amount being paid.  If there is a balance still due, the bill will stay open for that amount

Resolution for Issue 'I invoiced a vendor for materials that we bought on their behalf. They asked us to apply the amt due us to an invoice we owed them. How do I show the inv. as paid?' available: Yes (Solved).
Source: Intuit Community forum.

I invoiced a vendor for materials that we bought on their behalf. They asked us to apply the amt due us to an invoice we owed them. How do I show the inv. as paid?: this issue or error code is a known issue in Quickbooks Online (QBO) and/or Quickbooks. Support for this issue is available either by self-service or paid support options. Experts are available to resolve your Quickbooks issue to ensure minimal downtime and continue running your business. First try to resolve the issue yourself by looking for a resolution described below. If it is a complex issue or you are unable to solve the issue, you may contact us by clicking here or by using other support options.

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