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

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

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

(C) In paying the debts of the firm to third parties.

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

Choose the correct answer from the options given below:

As per the Indian Partnership Act, 1932 (Section 48), during dissolution of a firm, assets must be applied in a specific order.

The correct sequence of payment is:

1. External Liabilities First (C)

Debts of the firm to third parties must be paid first as they are outside creditors.

2. Partner's Loans (D)

After external debts, partner's advances or loans (as distinguished from capital) are paid proportionately.

3. Partner's Capital (A)

Once loans are settled, each partner receives what is due on account of capital, proportionately.

4. Surplus Distribution (B)

Any remaining amount (residue) is distributed among partners in their profit-sharing ratio.

The logic is straightforward: Outsiders → Partners as Creditors → Partners as Owners → Partners as Profit-sharers

This hierarchy ensures that external obligations are met first, then internal obligations in order of their nature.

Therefore, the correct order is (C), (D), (A), (B).

Correct Answer: Option 2