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:

According to Section 48 of the Indian Partnership Act, 1932, during dissolution of a partnership firm, the assets are applied in a specific order of priority.

The correct sequence is:

First Priority: Payment of debts to third parties (external creditors) - (C)

This includes all outside liabilities like creditors, bank loans, etc.

Second Priority: Payment of partners' loans or advances - (D)

Any amount advanced by partners to the firm (separate from capital contribution) is paid next.

Third Priority: Payment of partners' capital - (A)

Partners are paid back their capital contributions proportionately.

Fourth Priority: Distribution of surplus (if any) - (B)

Any remaining amount is distributed among partners in their profit sharing ratio.

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The logic behind this order ensures that external obligations are cleared first, followed by internal settlements. Partners' loans are treated separately from capital because they represent a debt owed by the firm to the partner (similar to external debt but with lower priority). Capital represents ownership stake and is returned only after all debts are settled. Finally, any profit is shared as per the partnership agreement.

Correct Answer: Option 2 - (C), (D), (A), (B)