Upon dissolution of a partnership, the firm’s properties are applied in the following order:

1. Payment of Debts to External Creditors: The firm’s liabilities to external creditors (those who are not partners) are settled first. These are debts owed to suppliers, lenders, or other third parties.
2. Payment of Debts to Partners for Loans or Advances: After external debts are paid, any loans or advances made by partners to the firm (distinct from their capital contributions) are repaid.
3. Settlement of Partners’ Capital Contributions: The next step is the repayment of each partner’s capital contribution to the firm. This ensures that the initial investments made by the partners are returned.
4. Distribution of Remaining Assets: Finally, any remaining assets or surplus after debts and capital have been settled are distributed among the partners according to the profit-sharing ratio outlined in the partnership agreement.