You can't apply a prepayment to the sales order because there is no money due on it until you create an invoice. I usually put SO1234-DEP in the Check/Reference No. field on my prepayments in order to indicate it is a deposit and which sales order it belongs to. Once the sale is completed and invoiced, you would select the invoice and the prepayment available in the payment screen.

This post is very helpful if you scroll down to the verified answer.

Thanks for that response.  So when you finally apply the prepayment once the sales invoice is generated, do you unselect the prepayment ie. select the check mark and then rekey the rest of the data?.

Once you create the prepayment, a credit is seen on the account. After the invoice is created and you are in the payment screen, you check off the line that has the credit (shown as a negative amount) and the invoice you want to apply that credit (prepayment). You either process the payment of the remaining amount due or send the invoice (with the credit applied) to your customer. You have to change the amount on the invoice line to match the amount of the prepayment for it to be canceled out properly if you are sending an invoice and not processing a payment at that time.

The screenshots and information in the verified answer on the post I linked above shows all of it so you can get a visual understanding.