During the dissolution of a partnership firm, the assets are applied in a specific sequence as per Section 48 of the Indian Partnership Act, 1932.
The correct order of settlement is:
First: External liabilities (debts to third parties) are paid → (D)
Second: Partners' loans or advances to the firm are repaid proportionately → (C)
Third: Partners' capital accounts are settled proportionately → (B)
Fourth: Any surplus remaining is distributed among partners in their profit sharing ratio → (A)
The logic behind this sequence is based on the priority of claims. Third-party creditors have the first right over the firm's assets. Among internal claims, partners in the capacity of creditors (through loans/advances) rank higher than partners as owners (capital contribution). Finally, profits are distributed only after all obligations are fulfilled.
The sequence is: (D) → (C) → (B) → (A)
Correct Option: 4