What is the reccomended way to do a negative invoice for a customer? I understand a credit memo is an option, but that doesn’t technically reduce the amount billed or payments recieved from the customer, it just reduces income. We overbilled a customer in a prior closed period, and want to invoice them a negative amount now to account for that

A Credit Memo reduces the customer's open A/R balance as well as decreasing Income so why wouldn't it be sufficient to capture the amount over invoiced? I think you may create more issues by trying to come up with a 'negative' invoice setup

Credit memo is generally the path I would take. Otherwise a discount item could be used to reduce the Revenue booked on a invoice. The overall invoice has to be creating revenue not acting like a CM.

Invoice transaction is Dr A/R, Cr Revenue; Customer Payment is Dr Bank, Cr A/R Credit memo is Dr Rev, Cr A/R Customer Refund is Cr Bank, Dr A/R