I have a customer that is also a vendor, The customer pays my invoice but deducts the amount for their vendor bill, How should this transaction be entered /accounted for?

Good day to you, psav. 

We can create a barter or clearing account to process those transactions. For a quick overview, you'll want to receive invoice payments and pay vendor (or supplier) bills through it. 

Creating a barter or clearing account: 

1. Go to Accounting, then choose Chart of Accounts. 
2. Click the New button.
3. Choose Cash at bank and in hand under Account Type.
4. Select Cash on hand for the Detail Type. 
5. Name as "Barter account" or similar. 
6. Click Save and Close. 

Next, create an invoice as you normally would and process a payment for it. Make sure to use the barter account when you're depositing. Just change the bank account under the Deposit to drop-down menu in the Receive payments screen. 

Finally, create a bill for their vendor (or supplier) account, then pay it using the barter account. Select it under the Payment account drop-down menu. Be sure to double-check and adjust the amount before proceeding. 

This is what the bank's Account History activity should look like after processing the transactions: 

You can also run a number of reports to see a detailed view of your transactions and cash activities. Our report articles can guide you here. 

I'm sure this will be useful for other similar transactions in the future. I appreciate your time visiting here and you're always welcome to post a new topic again. Thanks!