Arrange the following in correct sequence for application of assets in the Settlement of Accounts in Case Of Dissolution of a Partnership firm -

(A) The balance should be applied to repay loans made by the partners to the firm.

(B) The assets of the firm should be used in paying the debts of the firm to third parties.

(C) The balance assets may be used for paying partners proportionately, on account of capital.

(D) The asset's residue, if any, shall be divided among the partners in their profit sharing ratio.

Choose the correct answer from the options given below:

According to Section 48 of the Indian Partnership Act, 1932, the assets of a dissolved firm must be applied in a specific sequence:

First Priority: External liabilities (debts to third parties) must be paid first

→ Statement (B) - paying debts to third parties

Second Priority: Partners' loans to the firm are settled next

→ Statement (A) - repaying loans made by partners

Third Priority: Partners' capital accounts are settled proportionately

→ Statement (C) - paying partners on account of capital

Fourth Priority: Any remaining surplus is distributed in profit sharing ratio

→ Statement (D) - residue divided in profit sharing ratio

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The logic behind this sequence is that external creditors have the first claim on assets as they are outside parties. Partners' loans are considered internal liabilities but take precedence over capital. Capital represents the partners' investment, which is returned next. Only after all liabilities and capital are settled, any profit (surplus) is shared.

The correct sequence is: (B), (A), (C), (D)

Correct Answer: Option 3