How the 'interest on capital' adjustment is made in financial statements?

Debit side of profit & loss A/c + Add to capital of owner

The correct answer is option 3- Debit side of profit & loss A/c + Add to capital of owner.

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as expense for the business and the following journal entry is recorded in the books of account: Interest on capital A/c Dr.  To Capital A/c. In the final accounts, it is shown as an expense on the debit side of the profit and loss account and added to capital in the balance sheet.