I have two teenage girls (just took the first to college) so I know definace. I have not read other responses, but I can tell you that the book: "Children, the Challenge: The Classic Work on Improving Parent-Child Relations--Intelligent, Humane & Eminently Practical" (and I took a parent education class that used this book as the "text" - taught by other parents) made all the difference for me. The premise of the book is to constantly encourage our children through positive discipline, building trust, and living by natural consequences. It's awesome and completely different than the way i was raised - and probably the way you were raised.
Sounds like you are like me - I was working against my kids (this was the way I was raised) instead of trying to understand them, encourage them and work WITH them. Like you say, they're good kids. Your greatest gift to the 5-year old is to help her understand herself and how what she does/says effects others. THe more you can say, "what you just said is hurtful" or "I feel so angry about this", (and vice versa, "I love the way you just asked your sister to stop doing that!" or "I love the way you apologized for that - it makes me feel so much better")- the better. I still need to remind my teens that it is important that they "make amends" for a particular action/statement. I do NOT tell them they HAVE to apologize - just that they must undrestand their actions upset/hurt/angered another and they have to bring it to closure. This concept applies to a 5 year old - just using different language - I know because I did it (and like you, one of my kids is MUCH MUCH better at it - but as the older one once said to me, "Mom, just because I don't say things the same way as you doesn't mean I don't feel them" - BIG lesson for me).
Also, my kids were not "punished" - they experienced (not "suffered") the consequences of their choices and actions. When I could help them think through their choice in advance ("you understand that if you do x, y is likely to happen - just think about it"). This creates a link between them and the outcome. MUCH more effective than punishing (my kids, for example, have never been grounded as this does NOT work - they just sneak around). Again, applicable from the time they are tiny. As teens, the worst consquence is losing the trust of their parents- this devastates them, trust me as I didn't believe it unitl I experienced it - I just figured they didn't care one way or the other, but they do. Once that happens, their only job is to "earn back the trust" and they take it very seriously.
In terms of asking her, "what were you thinking?"....Honestly, like a teen, she really doesn't know - her brain is not fully developed and it's an incredibly unfair question. Instead, tell her (kindly) - "you know, when you do/say that, it is really hurtful/creates a problem for me/is not helpful. What do you think you could do instead??" You can brainstorm alternatives. This has been a very effective tool for me/my kids. I feel like I am literally giving them "tools" to use in the future - it is a VERY positive/encouraging way to approach these issues and a huge relief to them as they don't feel like a failure, like they're stupid, etc. Remember, encourage, encourage, encourage - ESPECIALLY when they make a mistake. This is your ideal time to teach, not shame.
Trust me, I understand how hard it is. Just taking one to college, I'm reliving every moment - painful. Just keep at it. I had to learn (and am learning) lots and lots of new skills - hard but worthwhile.
As an FYI, I don't understand calling your mother/father m'am/sir as it creates a clear power struggle (in my opinion), but maybe that is a geographical thing (ie- I have a friend from the south who insists that his son use these terms; having grown-up in the northeast, it is alien to me).
Good luck!
Updated
xx