An Overpayment Transaction creates a Credit Note against the relevant Customer / Supplier Contact.
Once you have created the Overpayment Transaction you then have the option to either allocate it to an existing invoice/bill or refund the money.

This Knowledge Article covers how to allocate an Overpayment transaction to an existing Invoice/Bill

In Xero go to Contacts > All Contacts
Find the Customer / Supplier Contact you have created the incorrect Overpayment transaction
Find the Overpayment transaction and click on the arrow next to the transaction, then select View
Once you clicked on View, the Overpayment transaction will open on the screen
Click on [Overpayment Options] > Allocate Credit
Type the credit amount in the Amount to Credit column next to the relevant invoice(s)/bill(s)
Click on [Allocate Credit]