This article will help you if you do not wish to apply the cancellation fee, the guest had already paid and the bill was already closed.
You go ahead and not apply the Cancellation fee when Cancelling the booking. Doing so creates rebated items in the bill.
Then a rebate of the night item will be created.
You will close it with the refund of the Guest.
The new bill will look like this:
The nights along with the City tax were cancelled and refunded.