You have a few of choices, each with their own advantages/disadvantages.

The 'cleanest' approach is to go to the supplier ledger and in the task list on the left, select "supplier refund", and you'll get a window much like the one for entering supplier payments. You can enter the amount, but you won't be able to allocate it against the original payment (because that'll be allocated against the original invoice) - so when you save it, it'll be a supplier refund on account.

The advantages of this approach are that it's the simplest and cleanest (by cleanest, I mean it doesn't involve editing or deleting any original transactions), and that because the payment was returned to the bank account, it'll give you a payment and a receipt on your bank rec to match the original payment and its return. The disadvantage is that when you pay the supplier again, you'll be paying against a refund - which might look odd if you send remittance advices from Sage - and over time, when you look back, it might not be obvious what happened without looking in detail. (Especially since Sage gives you a default text for the refund).

The next best option would be to deallocate the original payment from the invoice. Strictly speaking, there isn't a way to do this - and it only works in some circumstances (IIRC it doesn't work if you are on a cash basis for the VAT). To do this, find the transaction number for the original payment. Go to file maintenance, find the transaction and double click on it for editing. Change the supplier account to another, and save it. Then double click on it again, and change the supplier account back to the original, and save it again. Now the payment and invoice are unallocated. Now go to supplier refunds as before, but this time you can allocate the refund to the original payment.

The advantages here are that, as before, you have a payment and a receipt on your bank rec to match the original payment and its return, and the original invoice now shows as outstanding for when you make a new payment. The disadvantages are that it means playing around in file maintenance (which I don't like telling people to do if it can be avoided) and it might not work depending on your VAT basis.

The next option would be to just delete the payment via file maintenance - the main advantage being that it leaves the original invoice outstanding, the disadvantage is that the transactions on Sage (and your bank rec) no longer correspond to the actual transactions on the statement.

Personally, I'd go for the middle option - deallocate the payment if possible, then show a refund - and if that doesn't work, just go for the first option.

(Thinking about it, if you go for the first option, you can always edit the detail shown on the refund via file maintenance to make it clearer what happened - but again, it means using file maintenance! Come on, Sage - give us the option of entering some detail with supplier and customer payments and refunds! How hard can it be to provide another field at the top of the screen, and just put your default text if it's blank?)