On dissolution of a partnership firm, losses are first of all met................

Out of firm's profits

The correct answer is option 1- Out of firm's profits.

In case of dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. For this purpose, it disposes off all its assets for satisfying all the claims against it. In this context it should be noted that, subject to agreement among the partners, the following rules as provided in Section 48 of the Partnership Act 1932 shall apply.

(a) Treatment of Losses Losses, including deficiencies of capital, shall be paid :
(i) first out of profits.
(ii) next out of capital of partners.
(iii) lastly, if necessary, by the partners individually in their profit sharing ratio.