Arrange the following in a sequence, in which they will be utilize for the payment of losses:

(A) Out of capital of partners.

(B) Out of profits.

(C) By the partners individually in their profit sharing ratio.

Choose the correct answer from the options given below:

When losses occur in a partnership firm, they are absorbed in a specific order as per accounting principles:

First - Losses are adjusted against profits (accumulated profits, reserves, or profit and loss account credit balance). Any available profits should be utilized first to cover the losses.

Second - If profits are insufficient or not available, losses are then adjusted against the capital of partners. The loss is debited to partners' capital accounts in their profit sharing ratio, reducing their capital.

Third - If the capital becomes insufficient or negative (capital deficiency arises), then partners must bring in additional funds individually in their profit sharing ratio from their personal assets to meet the firm's obligations.

This is the standard order because a firm should first use its internal resources (profits and capital) before requiring partners to bring in personal funds. The capital account represents partners' investment in the firm, so it serves as a buffer after profits are exhausted.

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

Correct Option: 3