Arrange the following in the sequence in which they shall be applied in payment at the time of dissolution of a firm:

(A) The debts of the firm to the third parties.

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

(C) Each partner proportionately what is due to him on account of capital.

(D) Divided among the partners in their profit sharing ratio.

Choose the correct answer from the options given below:

At the time of 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 correct sequence of payment is:

1st Priority: Payment of debts to third parties (External creditors)

• All external liabilities must be settled first before any distribution to partners

2nd Priority: Payment of Partner's Loans (Advances)

• Any loans or advances given by partners to the firm are treated separately from capital
• These are paid proportionately to each partner

3rd Priority: Payment of Partner's Capital

• The capital contributed by each partner is returned proportionately

4th Priority: Distribution of Remaining Profit

• Any surplus left after settling all the above is divided among partners in their profit-sharing ratio

This gives us the sequence: (A) → (B) → (C) → (D)

The logic behind this order is that external obligations take priority over internal settlements, and partners' loans are considered more like external debts (though from partners) as they are advances distinct from their stake in the business. Capital is returned next, and only the residual profit is shared.

Correct Answer: Option 1