Step 1: Distinguish dissolution of firm from dissolution of partnership, to fix the meaning precisely:
When one partner retires but the rest continue the business under a new agreement, only the ‘partnership’ (the specific agreement) dissolves — the firm survives. Dissolution of the FIRM, by contrast, means the business itself stops, all assets are sold, all liabilities cleared, and the entity ends.
Step 2: Explain settlement of accounts as a strict priority queue:
Think of it as a queue of claimants on the firm's assets, in this exact order: outside creditors first (they are owed by law, ahead of everyone connected to the firm), then partners who had given the firm a loan (separate from their capital), then partners reclaiming their own capital, and only after all of that is anyone entitled to a final leftover surplus, split in the profit-sharing ratio.
Step 3: Apply the same priority logic to losses, in reverse:
Losses are absorbed first by whatever profit is still available, then by eating into partners' capital, and only if that is still insufficient does each partner have to contribute further from personal resources, again in the profit-sharing ratio — mirroring the same ratio used for gains.
Final Answer:
Dissolution of a firm ends the firm entirely, unlike dissolution of partnership which merely reconstitutes it. Settlement follows Sections 46 and 48: assets pay outside debts → partners' loans → partners' capital → residue in profit-sharing ratio; losses are absorbed by profits → capital → partners individually, also in profit-sharing ratio.