Those are called half-square triangles.
The 7/8" measurement is needed because an angled seam ends up taking up a bit more than a quarter inch allowance when you measure it from one of the horizontal or vertical seams. Just like the angled line you draw from corner to corner is longer than one of the sides would be. So there's jut a tiny bit more added in to make up for that extra.
But I am awful at making these turn out right, so personally I'd go for the 3" squares and then trim them back down after they're made.
