Hello CJ,
this is likely not an issue with the Physical/Financial negative inventory settings; those settings control inventory availability for stocked items, not how a sales credit should be created. For a credit, the recommended approach is to open the original invoiced Sales Order and use Sell > Credit note, which creates the reversing/negative transaction correctly; if the credit isn't related to an original sales order, you can instead create a Free Text Credit Note. So I would avoid manually entering a negative amount on a normal sales-category line and use the credit-note process instead.
Regards,
Oussama Sabbouh
