I saw this truth in my 3 year old, Alexa, last week. Her and her older sister had gotten into a spat. Evidently Alexa had hit Annika and Annika was crying about it. I did not see what happened and so I was interrogating them both to try and find out who the guilty culprit was. Annika insisted that Alexa had hit her. I asked Alexa if this was true and she shook her head indicating, "No."
So, I kept asking them both and Annika kept insisting on the fact that Alexa had hit her and Alexa kept denying it. Finally, I asked Alexa if she was telling me the truth and that I wanted her to tell me the truth.
Then, in a frustrated tone, Alexa said, "I can't tell the truth."
"For the mind that is set on the flesh is hostile to God, for it does not submit to God's law; indeed, it cannot. Those who are in the flesh cannot please God." (Rom. 8:7-8)
You hate to see the evidences of sin in the lives of your children, but it is encouraging to see God's Spirit working to help your children see and feel their own sinfulness. For that is required for the Gospel to indeed be Good News.