On dissolution of a firm, under which category of liabilities is the bank loan paid first from the realisation proceeds?

Correct answer: Outside liabilities

A bank loan is an outside liability of the firm. Therefore, realisation proceeds are first used to discharge outside liabilities, including bank loans and other external creditors. Partners’ loans are paid after outside liabilities, followed by the repayment of partners’ capitals. Hence, partners’ loans in option B do not receive priority over the bank loan. Exam tip: remember the order as outside liabilities, partners’ loans, and finally partners’ capitals.