This functionality is new as of version 4.0.
To Cancel Ordered Quantities:
Navigate to the 'Purchase Order Details' screen → 'Purchase Order' tab:
In the 'Cancelled Qty' field, enter the quantity to be cancelled.
Click the ‘Save’ button.
Purchase Order Status Update:
'Cancelled': If all of the Purchase Order Items were ‘Cancelled’, the Status will be updated to 'Cancelled'.
‘Incomplete’: If some of the Purchase Order Items were ‘Received’, and some, but not all, of the remaining items were ‘Cancelled’, the Status will be updated to 'Incomplete'.
'Received': If some of the Purchase Order Items were ‘Received’, and the remaining items were ‘Cancelled’, the Status will be updated to 'Received'.
Also see About Purchase Order Status.