If you would like to credit the customer the deposit follow these steps:

1. Change status to Cancel
2. Confirm the Order is to be canceled
3. Select the amount to be refunded and enter the amount (in some situations you might want to keep some of the deposit for your trouble)
4. Click on Pay/Refund (This will direct you back to the register screen)
5. From the register screen you can click on Refund
6. Select Store Credit to create a credit memo or any other payment option you prefer
7. Click Done

I would ignore the SKIP option  as it doesn't let you do anything with the deposit amount and there is no way to account for it.