Biodiesel is an alternative fuel to diesel engine that can replace or reduce the use of petroleum diesel. Biodiesel is derived from vegetable oils, animal fats, and waste cooking oils through transesterification reaction. This paper reviews the optimization of transesterification process for different varieties of biodiesel by considering the factors such as alcohols, fatty acid content, molar ratio of alcohols to oil, catalyst concentration, reaction temperature, and reaction time. The review also addresses various technical aspects of biodiesel usage in diesel engine to improve the cold flow properties, performance, combustion characteristics and reduce the emission characteristics, particularly nitric oxide and smoke compared to diesel through either modifying engine parameters like fuel injection pressure and timing or fuel modification by blending with alcohols, diesel, and metal based additives.