While settlement of Accounts, what should be the order of application of assets of Firm

(A) In paying the debts of the firm to the third parties

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

(C) divided among the partners in their profit sharing ratio.

(D) 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)

Choose the correct answer from the options given below:

When settling accounts of a firm during dissolution, the assets must be applied in a specific legal order as per Section 48 of the Indian Partnership Act, 1932.

The correct sequence is:

First Priority (A): Payment of debts to third parties (outside creditors). External liabilities must be cleared first as they have the highest claim on firm's assets.

Second Priority (D): Payment of partner's loans/advances. These are amounts advanced by partners to the firm as loans, which are distinct from their capital contributions. These rank after external debts but before capital.

Third Priority (B): Payment of partner's capital. After settling external debts and partner's loans, each partner receives their capital contribution proportionately.

Fourth Priority (C): Division of surplus (if any) among partners in their profit-sharing ratio. Any remaining amount after settling all dues is distributed as profit.

This order ensures that external creditors are protected first, followed by internal claims in a structured manner. Partner's loans are treated differently from capital because loans represent additional funds provided beyond the capital commitment, hence they get priority over capital repayment.

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