To cancel a booking you need to click on actions and in the sidebar on "Cancel Order".
You will then be asked if you want to add a cancellation fee. You can set a cancellation fee either on object level, or just put a cancellation fee on the whole order. If you don't want to add a cancellation fee you can either continue with a cancellation fee of 0, or click on "No Fees".
In this example, we add cancellation fee of 200€ on the whole order.
With that place you can click on "Continue".
You will then have the option to enter a cancellation reason, though that is entirely optional. You can simply continue by clicking on "Cancel Order".
Once you have cancelled the order you will be asked, whether you want to generate a cancellation invoice.
If the booking already had an invoice, it is highly recommended to generate the cancellation invoice.
If it didn't have one before, you don't necessarily need to generate one, though you might want to, depending on your accounting needs.
After that you will be asked, if you want to send a cancellation e-mail to the customer.
What this e-mail says can be defined in settings -> emails.
In most cases you will want to send the mail to the customer in order to confirm the cancellation.
Important note on cancellation fees
Once a cancellation fee has been set and a booking has been cancelled, you will not be able to change the cancellation fee, without reverting the booking status (which is not recommended).
If you have generated a cancellation invoice, you won't be able to change the cancellation fee at all.
If you happen to have cancelled a booking with a wrong fee and already generated an invoice, your best course of action is to create a new invoice (in a new booking) to correct the amount.