According to Section 48 of the Indian Partnership Act, 1932, during dissolution of a firm, losses (including deficiencies of capital) must be settled in a specific order of priority.
The correct sequence for settling losses is:
First → Out of Profits (C)
If profits are insufficient or there are no profits, then:
Second → Out of Capital of partners (A)
If capital is also insufficient, then:
Third → By the partners individually in their profit-sharing ratio (B)
This means partners must first utilize any available profits to cover losses. Only when profits are exhausted should capital be used. As a last resort, partners contribute from their personal assets in their profit-sharing ratio.
The sequence is: (C), (A), (B)
Correct Answer: Option 2