In case of the dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. Arrange the following in the correct sequence :

(A) In paying to each partner proportionately what is due to him on account of capital

(B) In paying the debts of the firm to the third parties

(C) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner's loan)

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

Choose the correct answer from the options given below:

During dissolution of a partnership firm, the assets must be applied in a specific order as per Section 48 of the Indian Partnership Act, 1932.

The legally prescribed sequence is:

First Priority: External liabilities must be settled → (B) Paying debts of the firm to third parties

Second Priority: Partner's loans are treated as liabilities separate from capital → (C) Paying each partner proportionately what is due from advances/loans

Third Priority: After external liabilities and partner's loans are cleared → (A) Paying to each partner proportionately what is due on account of capital

Fourth Priority: Any surplus remaining after all payments → (D) The residue shall be divided among partners in their profit sharing ratio

The logic behind this order is that:

• Third party creditors have the first claim as they are external stakeholders
• Partner's loans are treated as internal liabilities, ranking above capital
• Capital represents ownership and is returned only after all liabilities are settled
• Profit distribution happens only when there is a surplus after returning all amounts due

Therefore, the correct sequence is (B), (C), (A), (D) → Option 1