According to Buddhism when a person dies he or she could be re-born in any one of the 31 planes of existence. Some of these are “deva worlds” where beings who have developed good Karma are reborn. On the other hand those who have accumulated evil Karma are re-born in unhappy states called “hells” or as animals. There is an intermediate state where people who have not bothered to accumulate good Karma and yet at the same time have not done any serious evil deeds are born after their deaths. The living relatives or friends of such beings can do good deeds (give alms, donations etc) and mentally transmit the merits thus accrued to them. When these unhappy beings become aware that they have been remembered they experience happiness and are thus propelled into better states of existence. This is a practice called transference of merits. It is usually performed by symbolically pouring water from a large receptacle to a smaller container while focusing on the departed person at the end of a religious service.
Source : What Buddhists Believe by Chief Reverand Dr.K Sri Dhammananda