The active power filters have gained much more attention because of its excellent performance to mitigate the harmonic and reactive power issues. A shunt active power filter with Instantaneous active and reactive power theory (P-Q theory) has been proposed for its performance and ability to compensate the harmonics and reactive power.. It has been investigated through simulations that even under unbalanced and distorted conditions of AC distribution supply voltage and unbalanced loading, shunt active filter is able to produce the unity power factor and mitigate the Total Harmonic Distortion (THD) specified by power quality standards. Matlab/Simulink is used as a simulation tool for analysing.