diff --git a/hledger-lib/Hledger/Read/Common.hs b/hledger-lib/Hledger/Read/Common.hs
index 59b0e7d08..7c38af3be 100644
--- a/hledger-lib/Hledger/Read/Common.hs
+++ b/hledger-lib/Hledger/Read/Common.hs
@@ -77,4 +77,4 @@ expandPath pos fp = liftM mkRelative (expandHome fp)
                       | otherwise                = return inname
 
 fileSuffix :: FilePath -> String
-fileSuffix = reverse . takeWhile (/='.') . reverse . dropWhile (/='.')
\ No newline at end of file
+fileSuffix = reverse . takeWhile (/='.') . reverse . dropWhile (/='.')
diff --git a/hledger-lib/Hledger/Read/Journal.hs b/hledger-lib/Hledger/Read/Journal.hs
index a3d4783b6..5b47d1b34 100644
--- a/hledger-lib/Hledger/Read/Journal.hs
+++ b/hledger-lib/Hledger/Read/Journal.hs
@@ -123,6 +123,7 @@ import Text.ParserCombinators.Parsec hiding (parse)
 import Prelude hiding (readFile, putStr, putStrLn, print, getContents)
 import System.IO.UTF8
 #endif
+import System.FilePath
 import Hledger.Data.Utils
 import Hledger.Data.Types
 import Hledger.Data.Dates
@@ -214,7 +215,7 @@ ledgerInclude = do many1 spacenonewline
                    outerPos <- getPosition
                    let inIncluded = show outerPos ++ " in included file " ++ show filename ++ ":\n"
                    return $ do contents <- expandPath outerPos filename >>= readFileE outerPos
-                               case runParser journalFile outerState filename contents of
+                               case runParser journalFile outerState (combine ((takeDirectory . sourceName) outerPos) filename) contents of
                                  Right l   -> l `catchError` (throwError . (inIncluded ++))
                                  Left perr -> throwError $ inIncluded ++ show perr
     where readFileE outerPos filename = ErrorT $ liftM Right (readFile filename) `catch` leftError
diff --git a/tests/include.test b/tests/include.test
index 6e9ebca76..fa088b39a 100644
--- a/tests/include.test
+++ b/tests/include.test
@@ -1,5 +1,5 @@
 # nested includes in subdirectories
-mkdir -p b/c ; printf '2010/1/1\n (C)  1\n' >b/c/c.journal ; printf '2010/1/1\n (B)  1\n!include c/c.journal\n' >b/b.journal ; printf '2010/1/1\n (A)  1\n!include b/b.journal\n' >a.journal ; hledger -f a.journal print; rm -rf b
+mkdir -p b/c/d ; printf '2010/1/1\n (D)  1\n' >b/c/d/d.journal ; printf '2010/1/1\n (C)  1\n!include d/d.journal\n' >b/c/c.journal ; printf '2010/1/1\n (B)  1\n!include c/c.journal\n' >b/b.journal ; printf '2010/1/1\n (A)  1\n!include b/b.journal\n' >a.journal ; hledger -f a.journal print; rm -rf b
 >>>
 2010/01/01 
     (A)             1
@@ -10,3 +10,6 @@ mkdir -p b/c ; printf '2010/1/1\n (C)  1\n' >b/c/c.journal ; printf '2010/1/1\n
 2010/01/01 
     (C)             1
 
+2010/01/01 
+    (D)             1
+