The Back Order Cancellation functionality gives the User the ability to confirm that no back orders will be done (fulfilling the original quantity of the Sales Lines). Pressing this option from a "Sales Order" will close down any open Warehouse Documents that include a Quantity Outstanding and replace the value on the Sales Line for the Quantity to that of Quantity Invoiced. This allows the user to close down the "Sales Order" as well as its open Warehouse documents quickly and efficiently, confirming that no further quantity will be invoiced. Next to this manual process there is the possibility to cancel backorders automatically too.
In addition to sales, the back order cancellation (both with Cancel Backorder action and Automatic back order cancellation process with Prohibit Backorder and Cancel Backorder Tolerance % setup) works the same on the purchase side too.
With the automatic backorder process any "Warehouse Receipt" or activities are cleared down if the order is cancelled as nothing more is expected to be received. If the order only shipped/received the document will remain in the system. If the order invoiced as well the order will be deleted (depends on the Retain Document on Posting setup from "Sales & Receivables Setup" page).