I don't know that there is any one way children are supposed to be raised. A good mix of tenderness, caring, discipline, hard work and responsibility seems to be the best method for me.
My wife and I spend a lot of time instilling morals through experience. Kids will make mistakes and do bad things, and sometimes, you do have to punish them - it may mean a spanking, elevating their feet and knocking out push ups, digging out the fence posts and putting them back, or even the dreaded "we have to talk" method. No matter the punishment, I believe the key is making certain a) you are never angry/emotional when you punish and b) your children always know, whether being good or bad, that you love them.
Being a good example yourself is a huge help in the development of a child. My wife and I always come through on promises that we make, and I never allow my children to see me do something I would tell them not to do. Cursing is good example of that.
It is difficult to raise your children "right." Eventually, they will have to begin making choices for themselves, and all you can do is hope that what you have taught them and instilled in them will help to guide them - and if they do make a mistake, that they trust you enough to come to you about it.
As O3 said, setting limits is very important. I've seen many parents "get tired" and simply give in to their kids. Once you've set limits, stick to them. Kids are like dogs in the sense that if they see weakness, they will exploit it - and it won't be good for them in the long run.