On dissolution of a partnership firm, whose claim is settled first from the available amount according to the prescribed order of settlement?

Correct answer: Payment of external liabilities

The prescribed order of settlement on dissolution is: first, payment of external liabilities; second, repayment of loans or advances given by partners; third, return of partners’ capital; and finally, distribution of any remaining surplus among the partners. Therefore, external liabilities have the first priority. A partner’s loan is paid before capital but only after outside liabilities are settled. Exam tip: remember the sequence—external liabilities → partners’ loans → capital → surplus.