I can't seem to figure out how to get a great picture of a tongue and groove living room that also has ceiling molding, off of one of my houzz ideabooks to show you that this style you like, can and does look good together. I picked the collaborate feature and put your user name in it to try and share this pic.

When you say "Do we paint the paneling as well as the other side - the rails etc." what exactly do you mean by 'the other side"? Are you referring to the underside of the stairwell? If so, I would leave that element. If you paint the panelling just be sure to give it a sanding before doing anything. I just had the wood trim in my place painted (just baseboards, not panelling like this) and I was told that it didn't need to be sanded first. Boy, do I regret it - there are spots that are flaking off already, and it was a good quality paint and primer used. In your case, I would paint the panelling but not the banister and stair rails unless you are also planing on painting all of the wood trim upstairs. Doing the panelling will leave you with the lighter, fresher look, while still looking classic with the wood stair rails. Also, it looks like you have the wood panelling in the hallway/entry way leading to the stairs - I think you need to have a consistent treatment for both areas so would paint this as well.

I'm a first time poster and have managed to post twice by mistake!

It sounds lovely. The ceiling will be more than suitable for a transitional style. I think the wainscoting would also be fine but as I'm cautious I'd be adding after I'd lived there for a while. It does seem more traditional than transitional. On the other side I'd love the bead boarding in the hall.