In case of the dissolution of a firm, the firm ceases to conduct business and has to settle its accounts. Losses, including deficiencies of capital, shall be paid in the following manner and order:

(A) Out of capital of partners

(B) By the partners individually in their profit sharing ratio

(C) Profits

Choose the correct answer from the options given below:

(C), (A), (B)

The correct answer is option 2- (C), (A), (B).

(C) Profits

(A) Out of capital of partners

(B) By the partners individually in their profit sharing ratio

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, and
  (iii) lastly, if necessary, by the partners individually in their profit sharing ratio