As per the Indian Partnership Act, 1932 (Section 48), during dissolution of a firm, assets must be applied in a specific order.
The correct sequence of payment is:
1. External Liabilities First (C)
Debts of the firm to third parties must be paid first as they are outside creditors.
2. Partner's Loans (D)
After external debts, partner's advances or loans (as distinguished from capital) are paid proportionately.
3. Partner's Capital (A)
Once loans are settled, each partner receives what is due on account of capital, proportionately.
4. Surplus Distribution (B)
Any remaining amount (residue) is distributed among partners in their profit-sharing ratio.
The logic is straightforward: Outsiders → Partners as Creditors → Partners as Owners → Partners as Profit-sharers
This hierarchy ensures that external obligations are met first, then internal obligations in order of their nature.
Therefore, the correct order is (C), (D), (A), (B).
Correct Answer: Option 2