In what order should creditors and partners be paid during the liquidation of a partnership?

In the context of a partnership liquidation, the order of payment reflects the legal and financial priorities of different claims against the partnership's assets. The correct sequence begins with paying the creditors. This is because creditors have the first claim on the partnership's assets. By settling these obligations first, it ensures that the partnership meets its external commitments.

Following the settlement of creditor claims, the next priority is to settle any loans or advances made by partners to the partnership. These loans usually represent a liability of the partnership and thus must be addressed before the partners can reclaim their invested capital. This is crucial as it recognizes that the partners are not only equity holders but may also have lent money to the partnership that needs to be repaid.

Lastly, any remaining assets in the partnership are divided among the partners based on their capital accounts. Capital accounts reflect the partners' ownership interest in the partnership after all liabilities have been settled, including any special loans made by partners.

This structured approach ensures that all financial obligations are met in a fair sequence, respecting the legal hierarchy of claims on the partnership's assets.