The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be utilized in which sequence? Arrange the following in proper sequence

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

(B) 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)

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

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

Choose the correct answer from the options given below:

According to Section 48 of the Indian Partnership Act, 1932, when a firm is dissolved, the assets must be applied in a specific order. This is known as the order of application of assets.

The correct sequence is:

First Priority: External liabilities must be settled. The firm owes money to third parties (creditors, banks, etc.) and these debts must be paid first before any distribution to partners → (A) In paying the debts of the firm to the third parties

Second Priority: After external debts are cleared, the firm must pay what it owes to partners on account of loans or advances. These are amounts partners lent to the firm separately from their capital → (B) In paying each partner proportionately what is due to him/her for advances as distinguished from capital

Third Priority: Once loans to partners are settled, the capital accounts of partners are paid back → (C) In paying to each partner proportionately what is due to him on account of capital

Fourth Priority: If anything remains after settling all the above, it represents profit and must be divided among partners in their profit sharing ratio → (D) The residue, if any, shall be divided among the partners in their profit sharing ratio

The correct sequence is: (A), (B), (C), (D)

Note: Partner's loan is given preference over partner's capital because a loan is a liability of the firm, whereas capital represents ownership interest. External creditors get first priority as they are not owners and need protection.

Correct Answer: Option 4