While settlement of Accounts, what should be the order of application…

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

(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:

Answer & explanation

Correct answer: option 2

The correct answer is Option (2) → (A), (D), (B), (C)

Section 48 of the Partnership Act fixes the order in which the assets of a dissolved firm are applied: outsiders are paid before partners, and a partner’s loan before his capital.

(A) In paying the debts of the firm to the third parties — First, the debts of the firm to third parties (creditors, bank loans and other outside liabilities).
(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) — Next, each partner’s advances to the firm as distinguished from capital, that is, partners’ loans.
(B) In paying to each partner proportionately what is due to him on account of capital — Then, what is due to each partner on account of capital.
(C) divided among the partners in their profit sharing ratio. — Last, the residue, if any, divided among the partners in their profit sharing ratio.

NCERT (2026-27 edition):
Settlement of Accounts – “… (b) Application of Assets 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; and (iv) the residue, if any, shall be divided among the partners in their profit sharing ratio.”