Arrange the following steps as provided in section 48 of the Partnership Act 1932 in application of amount received from sale of assets.

(A) In paying the secured debts of the firm to the third parties
(B) The residue, shall be divided among the partners in their profit sharing ratio
(C) In paying each partner proportionately what is due to him from the firm for advances
(D) In paying the unsecured debts of the firm to the third parties
(E) In paying to each partner proportionately what is due to him on account of capital

Choose the correct answer from the options given below:

(A), (D), (C), (E), (B)

The correct answer is Option (1) - (A), (D), (C), (E), (B).

The assets of the firm, including any sum contributed by the partners to make up deficiencies of capital, shall be applied in the following manner and order:
(i) In paying the debts of the firm to the third parties.
(ii) In paying each partner proportionately what is due to him/her from the firm for advances as distinguished from capital (i.e. partner’ loan).
(iii) In paying to each partner proportionately what is due to him on account of capital.
(iv) the residue, if any, shall be divided among the partners in their profit sharing ratio.

So, The amount realized from assets along with contribution from partners, if required, shall be utilized first to pay off the outside liabilities of the firm such as creditors, loans, bank overdraft, bill payables, etc. (it may be noted that secured loans have precedence over the unsecured loans); the balance should be applied to repay loans made by the partners to the firm. (in case the balance amount is not adequate enough to pay off such loans and advances, they are to be paid proportionately). The amount left thereafter is utilized in settlement of capital account balances. Then the surplus if any is divided among partners in their profit sharing ratio.