The paper presents detailed explanation of the design of single-phase shunt active power filter (SAF) and its control circuit. "Compensating (reference) current" required to eliminate harmonics from load is produced by current subtraction method. "Hysteresis band" control topology is used to produce trigger signals required by inverter for producing "reference current." Power circuit is designed with three loads. Single phase inverter with dc source acting as SAF is connected to power circuit. To analyze the effect of SAF on power distribution system, simulation is done using PSim 6.0 Software. During simulation, variation is done in harmonic content of load and phase lag is created. Simulation is done for different load conditions and the results obtained are displayed in this paper. Paper presents the effect of SAF on source current, reference current produced, individual harmonic content of source current, and phase lag compensation. Analysis is done for different power parameters from results obtained through simulation. Power parameters like active power, reactive power, apparent power, and power factor are compared and examined under "with active filter" and "without active filter" conditions.