In case of the dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. Arrange in the correct manner and order the assets of the firm, including any sum contributed by the partners to make up for deficiencies of capital:

(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:

According to Section 48 of the Indian Partnership Act, 1932, when a firm is dissolved, the assets (including any deficiency made up by partners) must be applied in the following strict order:

First Priority: Pay debts to third parties (external creditors)

• This is statement (B)
• Outside creditors have the first claim on firm's assets

Second Priority: Pay partners' loans and advances

• This is statement (C)
• Partner's loan is different from capital - it's an advance given by partner to the firm
• This ranks above capital but below outside debts

Third Priority: Return capital to partners

• This is statement (A)
• Each partner gets back their capital contribution proportionately
• This is done only after satisfying outside debts and partner's loans

Final Step: Distribute any remaining surplus

• This is statement (D)
• Any residue left after paying all debts and returning capital is divided among partners in their profit sharing ratio
• This represents the profit from dissolution

The correct sequence is therefore: (B) → (C) → (A) → (D)

It's important to note that partner's loan (C) gets priority over partner's capital (A) because loan is treated as a liability of the firm, while capital is the owner's equity.

Correct Answer: Option 1