QB Issue Resolution:

1. Create a dummy bank account called clearing

2. Receive payments from the customers

3. Deposit those payments to the dummy clearing bank account

4. Pay the vendor bills using a check from the dummy clearing account in the amount received

4a. If there is a balance remaining owed to the vendor, pay the bill again using a real check or CC entry

Resolution for Issue 'One account as both Vendor and Customer. How do I apply what we owe them to what they owe us?' available: Yes (Solved).
Source: Intuit Community forum.

One account as both Vendor and Customer. How do I apply what we owe them to what they owe us?: 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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